How to set your consulting fees using perceived value?
The power of perceived value is a fascinating thing. And how one uses perceived value can be very significant. Even consultants, when setting up their consulting fees, have the option to use the perceived value method. But how do they go about it?
If you look at it, even recent scientific research agrees. In an essay for Forbes about behavioral economics, Mukul Patki asks the following question: “Are you more likely to admire a $5 bottle of wine, if I lied to you and told you that it costs $45?”
The answer, according to behavioral economic studies, is a resounding yes.
The reasons why this happens actually hold some fascinating lessons for business consultants. Besides having excellent analytical skills, as well as honed sales techniques for pitching ideas and proposals, a business consultant who has an understanding of perceived value and the science behind irrational value assessment can gain an edge over others when setting up their consulting fees.
We know this because we match up consultants with the companies who needs their particular skill sets. We know how hard it is for consultants to rely on networking to get by, and what it takes for a consultant to become a company’s preferred consultant. And we have the data and science to explain it.
The Power Of Perceived Value
Let’s look a little closer at the science behind perceived value. Although the following three examples—the wine-club experiment, the puzzle-solving experiment, and the growth-hacking example—lie outside of the business-consulting domain, they demonstrate powerful principles that consultants can use when determining how to go about setting up their consulting fees.
Researchers invited the Stanford Wine Club to taste a few bottles of wine. The bottles had no identifying labels on them other than price tags. One bottle was labeled with a $5 price tag. Another bottle was labeled with a $45 price tag. But this was the catch: the $45 price tag was a lie. The high-priced wine was no different from the $5 bottle.
The results were telling: the wine club rated the $45 bottle higher and the $5 bottle lower.
But the Stanford Wine Club were not being elitists. They really did enjoy the wine with the $45 label more, even though it was the same cheap wine in disguise. When the experiment was done again under an MRI machine, researchers found activity in the prefrontal cortex of the brain that showed that they really did experience greater pleasure when they drank the wine marked with a higher price.
The implications here are profound. Higher prices actually change the way our body experiences a product. The brain responds to a higher perceived value with a stronger release of dopamine.
But that’s just the beginning.
Does Higher Consulting Fees Mean Better Problem-Solving Skills?
Let’s look at this this way. When you buy consulting, you tend to look at the daily price and say: wow, it is expensive. For instance, I charge between $3 and 4k/day.
And people tell me it is expensive. But the thing is: they are buying my expertise and my experience. And it took me days, months and years to build that. Should they pay for this too? Since they are benefiting from my hard work?
What I mean by that is that when you buy from a consultant, you don’t only buy his time on your project. You also buy some of the time they spend working on their skills, researching, writing white papers and so on (and also working on other projects actually).
So yes, you are more likely to get better problem-solving skills from a consultant who charges higher consulting fees. And that’s purely because you are not only buying his or her expertise on the subject matter, but also their time spent on building that expertise.
Moving on, in another experiment that Patki references, researchers had students complete as many puzzles as they could in a set time. But beforehand, the researchers had the students purchase energy drinks with high levels of caffeine and sugar to improve their alertness during the puzzle test.
Here was the catch: half of the students had to pay full price, but the other half was given a huge discount. The results? The discount group solved fewer puzzles. In fact, their success rate was 30 percent lower than the group that paid full price.
The higher perceived value of the energy drink improved their alertness and focus.
Learning About Value Proposition From Growth Hackers
Behavioral economics and irrational value assessment can be, as Patki wrote, “the key to developing winning value propositions.”
Startup companies, in this case, provide a useful example. In Ryan Holiday’s monumental book on growth hacking, he used DropBox as the classic example. DropBox created an invitation-only waiting list for early adopters. Rumors about the waiting list spread, and a sense of exclusivity swarmed around the new app. The waiting list exploded to 75,000 names, and when the app was released, it was a huge success.
Building perceived value, whether or not anyone knew anything about Dropbox, sent their value proposition sky-high. It strengthened their promise of value that they would deliver to their clients, and it created a strong belief within the clients that the promised value would be delivered.
Consultants Using Perceived Value Principles To Set Consulting Fees
Although the example above involves startup company tactics, the general principle is the same for consultants: use the power of social proof and exclusivity—while retaining courteous professionalism—to help companies see your value.
The psychology behind it has been proven: when a person is asked to work a little extra or pay higher to get something, their belief in the value of that person or idea increases.
At the end of the day, the more value you bring as a consultant, the more you are recognized. And when this happens, consultants are more likely to use perceived value principles to set up their consulting fees.
But the reverse is also true and by underpricing (setting up your consulting fees at a lesser amount) for the value you deliver you may impact negatively the way you are perceived and drive yourself out of the race you thought you would win through a large discount.
In the context of business consulting, it is a subtle art. You should always be easy to work with—as we explain in our blog post “The 10 Commandments of a Great Consultant” — but you should also be careful that you’re not diminishing your perceived value and lowering the consulting fees initially set by you. Make conscious and strategic efforts to increase it when you can do it in a reasonable way.
Apply to yourself some simple principles to align your pricing and the value you deliver. Keeping a detailed database filled with information from evaluation and feedback can be of priceless value. It will help you to continuously improve your overall game, and you’ll know exactly how to set up your consulting fees for the next and upcoming projects.
And no matter what kind of strategy you employ on the ground level, the broader lesson here is simple: do not neglect the incredible power of irrational value assessment, and use it as a complement to your carefully hone your analytical and sales skills. Because at the end of the day, you know what value you will bring, and based on that, you can set your consulting fees for consulting projects that come your way.
Hélène Laffitte is the CEO of Consulting Quest, a Global Performance-Driven Consulting Platform and author of “Smart Consulting Sourcing”, a step by step guide to getting the best ROI from your consulting. With a blend of experience in Procurement and Consulting, Hélène is passionate about helping Companies create more value through Consulting.