How Consulting Companies Calculate Their Fees

The pricing of consulting services is a complex process that depends on a variety of factors. The most common pricing model is the hourly formula, where consultants charge by the hour for their services. Other models include value-based pricing, consulting fee calculators, and monthly withholding. In addition, consultants may offer discounts for withholding charges.

When a consulting firm takes on a project, they agree on the price of the contract and what the delivery will be. This type of model is called a fixed fee, as the client will pay the agreed fee regardless of the outcome. However, there are other alternative models that appear. To understand the economics of a consulting business unit, let's look at a hypothetical case example.

A large consumer electronics company hires McKinsey to help them assess whether they should enter the online advertising space through their presence on digital devices. Based on initial discussions with the client, the firm agrees to take on the case and assigns a 12-week deadline. The revenue side is likely to be the simple part, as clients agree in advance with the consulting firm on the price of the contract and what the delivery will be. The key product is recommendation itself, not data assets.

To reduce costs, firms tend to locate themselves at their clients' sites for most of the week so that they can be available to collect data, interview stakeholders, present it to stakeholders, and so on. When putting together all the data, here is an approximate unit economy of a case: once a fixed commission or milestone commission case is agreed with the client, there is only one lever that the company has to drive its own profitability and that is to reduce costs. Since most of the cost is labor, this often comes down to reducing labor involved. In addition to hourly or per-project invoices, some consultants offer discounts for withholding charges since they prefer consistent revenues.

It's important to look at consulting fees by industry as another data benchmark but not as your pricing bible. The real price of consulting hires is a closely guarded secret and typically only senior management knows all the details and costs. Consulting firms calculate project cost based on a wide variety of factors such as project deliverables, project type, customer location, and customer relationship. The next key question is where do you fit into this image? Let's start by looking at the entry points into the consulting business, what salaries are available to you and what your career progress could look like.

Trent Monserrate
Trent Monserrate

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