How to build a profitable consultancy

Whatever you want to achieve as a consulting business, you won't get very far without profit. It provides opportunity to invest in the team and the future of the business.

These are the key levers that owners of consultancies can pull to improve profitability:

1. PLANNING

The first driver of profitability is effective planning to make sure profit is right at the centre of your business. There are three strategies to achieve it:

1. Your role as owner is to lead your consultancy so that it can flourish without you being involved in every tiny detail, which can take your focus away from making you more profitable.
2. When you are creating your plans, think about the costs and gross margin first – aim for a gross margin of more than 55% (the current average for consulting firms).
3. Don’t forget about utilisation rates and how much time each member of staff spends working on client projects.

The top-performing consulting firms can break down profitability by client and then by service. They look at where they make money, where they don’t, and the end goal.

Know where you’re making a profit and where you're not can provide an accurate forecast for all sales and costs in the company. From there you can identify:

• how many large, medium and small projects you’re going to need to win
• where that revenue will come from – existing clients vs new clients
• how many opportunities you need to generate and at what conversion rate to get the profit you want.

It’s the detail and the nuances that matter. Once you know that a client is not profitable, you will do something about it. Once you know a particular service is disproportionately more profitable and valuable to you, you will sell more of it.

It's also important to focus. Trying to be everything to everyone often has the opposite of its desired effect in achieving profit, so if a consultancy can successfully differentiate itself, it will then be able to charge more and offer premium products or services.

Try to work out and focus on your profit sweet spot. What are the particular things that you do better than your competitors? Or what activities do your clients value most? It's likely clients would be willing to pay highly for those things.

2. PRICING

There is a huge correlation between pricing and profitability and a higher price equals higher profitability.

During sessions with The Consultancy Growth Network, Wow's co-founder Peter Czapp encourages all consultancies to offer more than one pricing option when quoting for work. “We decide value by making comparisons,” he explains. “If you only offer one option, you are inviting your buyer to compare your price to your competitors.

Research shows that by making more than one offer you have the opportunity to position each of your offerings to make one look more favourable.” Blair Enns’ book ‘Pricing Creativity’ is a fantastic read for more on this.

Peter also encourages regular reviews of your pricing to check that you are not undervaluing yourselves and losing profit. A recent Consultancy BenchPress event highlighted that 91% of consultancies don’t increase contract prices in line with inflation.

“If you’re hiring better people, gaining valuable experience, and improving what you do, you’ll be adding more value to your clients. Your prices should reflect this additional value that you’re now able to deliver,” he says.

Another avenue is to win larger clients with bigger budgets. The most profitable consulting firms, on average, are those that work with big deals and large companies. “One thing that will help that is your ability to specialise. The more specialist and the more niche consultancies become, the higher price they can charge and the greater profit they make,” Peter said.

Finally, Peter believes that discounting strategies do not benefit your consultancy in the long term. Here are some alternatives to discounting.

You can read the rest of this article over on The Consultancy Growth Network website, with strategic advice on the other key levers of profitability: project management, optimising profit from existing clients, and creating a profit culture. Check it out here.