You’ve seen a zillion articles that agonize over complicated hourly consulting rate calculations written by people who charge middle-of-the-road prices (the same people who are either afraid to or don’t know how to compete at the top of their market). If you’re ready for something better, read on. If you want to charge mediocre rates, look elsewhere.
If you choose to keep reading, you’ll find out:
- how I’ve raised my hourly rate nearly 100% over the past 7 years consulting (my current standard hourly rate is $195),
- how I commonly earn effective hourly rates between $300 – $1,000+,
- why I actually DON’T recommend charging hourly, and
- how to set an hourly rate (if you decide to charge hourly anyway).
For those of you who like short posts, I’m going to apologize in advance for this long rant. But from what you’ve been telling me on the content survey, this is one of the most-desired topics. So let’s get to it!
When you become a consultant, there are a bunch of ways to determine your hourly consulting rate:
- What the market will bear—i.e., what other similar consultants are charging.
- 3x your current salary pro-rated to your annual work hours (usually 2080 hours/year, though you won’t bill that many hours). For example, if your current salary at your day job is $50,000, your currently hourly rate is $24; multiplied by 3 gets you to a consulting rate of $72/hour.
- Complicated formulas that use your target salary, benefits & expenses/overhead estimates, taxes, profit percentages, work days per year, billable hours per day, bad debt estimates, etc. These make my head hurt, and—I think—are a waste of time, since you’ll probably arrive at roughly the same number as in #2 above.
- By project estimation—keep in mind that estimates are tricky when you’re starting out and even for experienced consultants.
- By using a daily consulting rate.
- By commission/performance: this is very tricky to estimate, and involves risk for the consultant.
- A retainer: i.e., the client pays you a flat monthly fee, and you do work for them. Some months you work a little, while other months you work more.
- Based on the value you provide, which moves beyond limiting you to an hourly rate. This can be tricky, and involves some finesse, but often has the best potential for earning you the highest effective rate, and is generally what I recommend. For example, if you know you can save your client $X, then it can be reasonable to charge them $X * 10%. This pricing strategy is how I commonly earn effective hourly consulting rates between $300 – $1,000+ (your effective hourly rate is the revenue you earn divided by the number of hours you work). Now, clients typically won’t want to pay $300 – $1,000+ per hour, but you can earn that if you base your price on the value the client receives. And this is why I don’t recommend charging hourly. But…
In nearly all cases, you’ll still need to have an hourly rate from which to base any estimate, retainer, commission, etc. Besides, I’d bet you’ll be hard pressed to find a client who is NOT familiar with a consultant charging an hourly rate; some clients will want you to charge a flat, per-project rate, which, again, will require you to estimate the project cost based on your hourly rate.
So how do I figure out how much to charge already?!
You can use a simple method that doesn’t involve too much time and hand-wringing, and is based on the tried-and-true hourly model, with some twists for leveraging your time. And like I already pointed out, the hourly model is often the basis for most of the other billing models as well (project-based, retainer, daily rate, etc.).
When you become a consultant, here are some ways to figure out what your consulting rate should be:
- Look at similar skill sets for workers who are in your country on a site like ODesk—and promptly ignore them, since there will likely be gobs of people charging a fraction of what you’ll be able to charge.
- If you work at a company which does consulting (as I did), find out what you’re being billed out at, and then set your rate to something similar. This is what I did, and I still monitor what that software vendor’s consulting rates are, so that mine are similar.
- Find job postings for similar positions/jobs in your geographic area, and look at the salaries. A site like Glassdoor could give you some useful salary info. You’ll want to at least double (or triple) the pro-rated hourly salary rate to arrive at an hourly consulting rate. You may also want to set your rate higher (by 15-25%) to cover your overhead costs.
- If you already know consultants in your area of expertise, politely ask how much they charge. I also did this when I was thinking of starting a consulting business.
- Since you’re now an employer, interview prospective job hunters/consultants who have your skill set, and find out what their rate is. Then, you can set your rate in the same ballpark. While you’re at it calling other consultants, you can find out more about their niches and who they’ve worked for to see what the more profitable niches are in your area of expertise.
You don’t have to get an exact rate, but at least be in the ballpark. Clients will be willing to pay more for expertise, and will want to keep you for your knowledge of their organization and your relationships you’ve built with them after you’ve done work for them. After you’ve started consulting and/or get additional rate info, you can change your rate as needed–it doesn’t have to be set in stone.
You can charge more within a niche
If you can specialize, you’ll be better off. There will be fewer competitors, and you’ll be able to charge a premium for your expertise. I’ll have more info on how to find a profitable niche in a future post, so stay tuned.
Aim for “good enough”
Don’t spend a ton of time on this—or any—task. Aim for good enough, and adjust as you go. My current standard rate is 100% higher than when I was first became a consultant, and I’ve seen no falloff in business; on the contrary: as I’ve become better known in my niche, I’ve gotten more work with less marketing efforts.
A few other tips & tricks
- Make sure to use a contract so that you don’t end up working a bunch of non-billable hours, and can bill for scope changes to projects. Depending on the project, your contract language could also state that the client will be billed for any scoping hours.
- Make sure your clients know that any pricing quote is really just an estimate, and that they’ll be billed for actual hours worked.
- Speaking of estimates, make sure to pad your estimates. No, I’m not saying you should bill for time that you don’t actually work. First, I bet that your estimates will likely be on the low side, especially when you’re starting out. Second, you want to deliver the project UNDER-budget, since clients are happy to pay less than they originally expected. And third, you’ll typically run into unforeseen issues which take time to address, and you’ll want to be able to bill for that time; adding a line item to your estimate for, say, an additional 10-20% for a catch-all like “project management, functionality testing, data proofing, etc.” can allow you to bill for all your time and still come in under budget.
- Be matter-of-fact when discussing your rate. Someone once advised me that when asking for a raise, say the number you want, and “don’t blink.” The same applies to telling your clients your rate.
- Don’t negotiate your rate. You might start out at a lower rate than what the market will bear, but you can increase it as you go along. I raise my fees annually, and haven’t had any clients balk at the increase—after all, they do the same thing, and charge much more than me.
- Don’t fall into the trap of charging too little—you’ll work more to make the same revenue, and it’s difficult to raise your rate more than say, 10% per year. Besides, clients expect to pay a premium for expertise.
Whew! That should give you a few things you can start doing to determine your rate as you become a consultant. If you have any other ideas, thoughts, tips, or tricks, I’d love to hear them!
Free report: An experiment that raised my rate 70%
Whether you just started consulting or have been doing it for years, you’ll want to check out the free report on how I boosted by consulting rate 70%.
The report shows the exact details on how I did it, and how you can implement those same tactics to get similar–or even better–results in your own consulting business.