How to set your rate

How to set your rate

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:

  1. What the market will bear—i.e., what other similar consultants are charging.
  2. 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.
  3. 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.
  4. By project estimation—keep in mind that estimates are tricky when you’re starting out and even for experienced consultants.
  5. By using a daily consulting rate.
  6. By commission/performance:  this is very tricky to estimate, and involves risk for the consultant.
  7. 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.
  8. 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.

  • Dr.Annabelle B.Jamin

    I am very interested to put up a consultancy firm,I am hoping to have more information how to start my business.

    Thank you…

  • admin

    Thanks for your comment! Please let me know what info would be helpful in starting your consultancy firm.

  • Marsha

    The whole “How do I figure out how much to charge”? is my biggest worry. This was very helpful. I am a teacher (who has done some consulting on the side, and really enjoy the projects that I have taken on). Prospects for teachers are grim these days, and I am considering the consulting route as an alternative to packing my family up and moving for work. Thanks for the advice.

    • admin

      Thanks for your comment, and I’m glad you found it helpful!

      With the lackluster economy, I think a lot of people are looking for additional sources of income, and consulting is definitely a good one.

      As you mentioned, it’s difficult to have to move your family for better job opportunities. However, as a consultant, you’re going to have a lot more freedom to choose where you live. I actually have clients scattered across the country, and none in my home state; I do all the work remotely, and have only had to travel once in 4+ years. That may not be the pattern for all consultants, but you’ll certainly have more flexibility being self-employed.

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  • http://www.businessdevelopmentprofessionals.co.nz Craig

    I really like your website. I have recently started a business consultancy and am interested how you work remotely? I would like to live in the countryside but my clients are in the city and I do not like commuting.

    Craig

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Thanks!

      In a lot of cases, working remotely is possible, but it may depend on your niche and the type of consulting services you provide. For the consulting that I do (database & software consulting for law firms), I’ve only had to go on a client site 1 time in the past 5 years. Sometimes clients ask me if I do on-site work, and although I always say “yes,” I find that either the work can be done remotely or that I can subcontract the on-site work to a colleague. In the case of subcontracting my colleague, she’s a CPA (which I’m not), and so it’s much easier to justify having a CPA on site to either do group training and/or work through the firm’s accounting set-up or clean-up.

      In any case, there are a couple main tools I use for working remotely:

      GoToMeeting: let’s me dial in to a users desktop to see what they see. Invaluable for troubleshooting, as well as remote support. Cost is about $350/year.

      RDP/Terminal Server: This is the main way that I dial in to client sites to do on-site work. The client’s IT person or contractor configures it, then gives me the dial-in info. Free.

      Skype: I use Skype for all my phone calls (which costs about $60/year, including my own phone number). Skype also gives you voicemail, and can forward calls to your mobile phone; you can also do screen sharing, but the resolution is subpar compared to GoToMeeting. Skype also offers video calls.

      Dropbox: This is good for getting files to a client site from my machine since GoToMeeting doesn’t have a file upload feature, and RDP sometimes doesn’t map my machine to allow file sharing. Free.

      YouSendIt: Lets you e-mail large files to clients. Free.

      Google Docs: Let’s you store files (any file type, not just docs) in the cloud, and manage and share files between people. Free.

      If you absolutely must be on-site, you could cluster your on-site visits on a specific day or 2 of the week so that you’re not constantly on the road. That’s similar to how I do my client phone calls, so that I get all the info I need, and can then go off and do the technical work at home, in a cafe, or in my office whenever I want–which means I can schedule other stuff during my days (lunch with my wife, volunteering in my kids’ school, etc.).

      You can check out more tools on my Tools/Resources page:
      http://startmyconsultingbusiness.com/tools-resources/

  • Ali

    well,i found every thing helpfull in here,and thank you so much.but my issue is that i graduated in the worst time of this life when the economy was realy down,i have earned a B.H of electrical and telcommunication and a punch of microsoft certifications,i have not worked in the industry so i thought about openin my own business but am worried cause i don’t have that much experience in the industry,what do you think i have to do?

    Thanks again for your help

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Thanks for your comment!

      Don’t worry about how the economy is doing. There are always opportunities, and people will always pay for value.

      Since you have a degree in a specialized technical field, and have technical certifications, that tells me that you have specialized knowledge that businesses will pay for. The next step is determining exactly who your target customers are, and what problems they most need to solve. Once you know that, it’s just a matter of finding and snagging clients. That’s not to say it’ll be easy, but those will be the basic steps you’ll need to follow.

      Creating a successful business requires resourcefulness, creativity, and the confidence that your actions will produce results. So, ignore the economy and any other factors outside your control, and focus on the things you can do to begin creating your business.

  • Travis

    Thanks for the great article man! I’m a staff aug consultant in FL and recently finished a contract and have been really thinking about starting my own consulting business. Are there any tips you can offer that’ll help me get started? For example, since it’ll be only me working should I create a sole proprietorship or an LLC? Any info would be greatly appreciated. Thanks in advance!

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Thanks for your comment–glad you found the article useful.

      As for choosing a business entity, I’d be inclined to go with either an LLC or s-corp, since they offer some liability protection and can also give you some tax benefits. You can check out an article I did on choosing a legal entity here:
      http://startmyconsultingbusiness.com/get-over-it-choose-a-legal-entity/

      Of course–obligatory caveat–I’m not an accountant or attorney, so you’ll want to seek the advice of qualified professionals.

  • Matt

    Not sure if this thread is still being monitored but…I am going to do some consulting for a short to mid time period (maybe the rest of the year). The rate I will be earning is in line with the formula above so thanks for that info. As I will only be consulting for 20 hours a month (to assist a former employer) i am wondering if it is worth forming an LLC, S-Corp, or similar or since the income will be relatively small for the year, is it even worth it. Any opinions?

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Hey, Matt, thanks for your comment! LLC’s and s-corp’s can be fairly equivalent, but it depends on the specifics of your situation.

      One other thing to keep in mind is that when consulting for a former employer, they’ll often have a tendency to still treat you as an employee. So, you’ll want to be clear about the ground rules and expectations going in. Same idea with your consulting rate for your former employer: they’ll typically want to pay you roughly your former salary hourly rate, instead of the market consulting rate for your services. However, even better would be to use value-based pricing for the project, since that has the potential to greatly boost your effective hourly rate.

  • Nina

    I’m planning to work as online consultant since I studied business (international business and HR and management) at university of applied sciences. how can I determine my rate and get clients? I would do business consulting, HR consulting and investment advising. I would like to have clients from many countries since I speak and write many languages.

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Hey, Nina, thanks for your comment! That’s a great question. What I’d first do is target the exact type of markets and potential clients with whom you want to work. Next, you’ll need to find out who your competitors are in that target market, and get an idea of what the prevailing rates are. Those will be a guide for your rates. However, and more important, you’ll need to peg your rates based on the specific, quantifiable value you can provide your clients.

    • Natalya

      Hi Nina, My name is Natalya, I have actually worked in this specific inviroment for the past 5 years – Int’l HR, process improvement, mergers, realigning polcies and proceedures, and I am also bilingual. I am now stay at home mom and looking for ways to get into consulting – would you like to team up?

      Hi Greg, do you think it is a good idea to team up or the start up should be flown solo? I sense there are multiple benefits to having a partner in different state – increased access to more clients for one, but can you think of watch outs or reasons not to?
      Thank you both for reading and posting and your responses.

      • http://www.StartMyConsultingBusiness.com Greg Miliates

        Hey, Natalya, thanks for the question!

        This is actually a really good question. When I was first thinking of forming my consulting s-corp, I considered a formal partnership with another consultant, since we had complimentary skills, etc. In the end, I decided not to partner, and it was a really good decision.

        Dave Ramsey (the financial counselor) says that the only kind of ship that doesn’t sail is a partnership. Glib, but true.

        Business partnerships are a bit like marriage, so if you’re not completely in sync with your partner(s), you’re in for lots of trouble and lots of stress.

        What I’ve found works far better was to form my own business entity, then informally partner with other consultants. Essentially, we refer clients back and forth, and now, rather than referring clients away, I’ll keep the client, but subcontract work that I can’t/don’t personally do. That way, I control and keep the client relationship.

  • Tal

    I do regulatory paperwork for small mom and pop enterprises that avoid contracts like the plague. They like doing business with a handshake or just a phone call. Am I missing some liability here for losing income or working on the cheap? Excellent article-just what I’ve been looking for.

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Thanks for your comment, Tal! That’s actually OK if clients don’t prefer to use a contract; for solo consultants, you’ll rarely if ever end up enforcing a contract by using an attorney anyway. More important is to screen potential clients beforehand so you reduce the chances that they’ll be a non-paying, or discount-chasing, or high-maintenance client. People who are easy to work with before the sale are typically easy to work with during the project. If your gut tells you something’s wrong, then it usually is.

  • Tonya

    Thank you! I’m considering leaving a long term full time job to do consulting and this is helpful – actually, it’s very encouraging. I have a few different avenues I could pursue and am going to fully explore this site!

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Hey, Tonya, thanks for your comment–I’m glad you found the article useful!

  • ImEveryWoman

    Great article!!! Thank you soooo much!!!! I own a tax business and only work 4 months a year. I was looking to work as a consultant the other 8 months. I have started 3 successful businesses, and before that worked in management / marketing / fundraising / human resources with the same company as a VP for 13 years. I stumbled on my first consulting job today and my client / friend asked what was my hourly rate. I had no clue! Thank goodness I found you!!! I did the calculations based on model #2 and my hourly rate should be $118 per hour. I will give him a discount being he is a friend and my first client! He has a dermatology practice and a foundation he wants my help with. This is exciting!!! Thanks again! Let me know if you have any tips!!!

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Thanks! One thing I’ve found is that most consultants starting out have a VERY hard time charging market rates–simply because they’re so used to their salary hourly rate. Getting past that hurdle is a huge step, but one that will propel you forward, and literally allow you to earn more and work less.

  • aeneas

    this was very helpful. i have been a manager for five years. over that time i have interviewed hundreds of people. based on my own professional reading and experience as an interviewer, i am looking to start an interviewing consulting business on the side, coaching job seekers how to prepare for interviews. i hold two master’s degrees but neither are an mba. should i consider myself an amateur consultant and pick an hourly rate accordingly? i guess i am wondering if that would be the 3x rule of my current salary as a manager or is it something less since i do not have the mba? does education matter when determining your rate?

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Great question. Generally, your degree and professional certifications matter very little. Personally, I work with attorneys and accounting people doing database/software programming, but am not a programmer/attorney/accountant, and have a B.S. in psychology and an M.A. in recreation (yes, it’s for real); however, my hourly rates are roughly $175.

      The more important factor in setting–and getting paid–your rate is the value you provide to your clients. If there’s little value they get, then your rate will be fairly low; if the value is immense, you can charge what equates to hundreds–or even thousands–of dollars per hour.

      If I were you, I might consider targeting people who are looking for high-paying jobs, since the value of landing that type of job–or negotiating for a higher compensation package–is huge. You can look at what similar consultants charge, but a better approach is to peg your price to the value your clients receive, and maybe pricing yourself at about 10% of the projected value they’d get.

      For example, if you can coach people so they can land 6-figure jobs or negotiate their salary/compensation upwards of 10%, then pricing your services at $1k, $2k, or even $5k+ might be a reasonable investment for your clients to make. Again, you’ll need to consider the value your clients receive from working with you.

  • sonia

    Thank you – this was very helpful as I am only just starting off.

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Sure thing, Sonia! Pricing can be a tricky thing–more so because we all get wrapped up in the emotional issues of what we thing we’re worth.

  • Kate

    Hi, I have a question. I have been approached several times with people wanting to start their own product line. I am in the fashion industry with 17 years experience in a niche market. The products they want is outside of my niche market but I’m very knowledgeable with contacts everywhere. Should I still charge my x3 or a little more? I am still at my full time job, so this would be a side business to earn extra $. Thank you!

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Hey, Kate, thanks, and that’s a great question.

      You can do a ballpark 3x rate, since that’s an easy calculation.

      However, I’ve found that it’s better to tie your price to the value you’ll provide to your clients, since you’ll typically end up boosting your effective hourly rate (i.e., the amount you earn compared to the hours you work), and it forces you to highlight the value the client will receive–that way, you re-frame your price as an investment in getting their desired result, rather than a cost for a deliverable.

      The bottom line is that it’s possible to earn far more (anywhere between 50%, 100%, 200%+ more) by pricing on your value rather than a quick 3x rate.

      Here’s an article I wrote on the topic: http://startmyconsultingbusiness.com/the-experiment-that-boosted-my-rate-70/

  • lena

    great article. would love your insight on my situation. I worked for a health research firm for 4 years, then I moved overseas. They asked if I’d be interested in being their ‘point person’ on the ground to organize logistics for international conferences where I am now based. I took on the role of a consultant with a rate that was calculated using my last full time salary for the organization as a base. I organized one conference last year successfully. They have asked me to help organize 3 short conferences this year at the same rate. I am wondering if I should be negotiating raising my rate, given rise in cost of living, taxes, and if so what is the usual percentage–10%?

    Also I asked for the payment to be made in dollars, not local currency. Would that affect the percentage of the ask? And finally if they say no, the rate from last year is the only thing they can offer…how can I turn that into a discussion for future negotiations? I don’t want to burn my bridges as I hope to work for the organization again when I return to the US but want to be compensated fairly.

    thanks!

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Thanks for your comment, Lena!

      Yes, absolutely renegotiate your rate. It’s–sadly–too common for consultants to get hired by their former employer (that’s not the sad part) at essentially their old pro-rated hourly rate, even though the value you provide is far in excess of your hourly rate.

      What I’d suggest is to frame the discussion in terms of what value the client gets from the events/conferences you’re coordinating. Do they get projects/business, new partnerships, market exposure or an “in” to new markets, or some other benefits from these events? Figure out what the client gets, then quantify it as best you can (this might require getting some info from the client).

      Once you have some semi-solid–or at least believable–numbers, you can peg your price to that. Generally, clients find it an easy decision to invest 1/10th to get the value you’ve outlined. For example, if they’ll get $100,000 in new sales per conference, your price could be $10,000.

      And, yes, get payment in dollars (or whatever the client’s home currency is).

      If you focus on the value they get, it’s far easier to justify your pricing. The client doesn’t care about your living expenses, taxes, etc.

  • Jared

    Is it expected that travel expenses are included in the consulting rate? I have been asked to be a consultant on a project with potential for additional projects. To begin, they are paying the travel expenses. I am setting up the contract and need to set the rate. Is it typical that the travel expenses are paid by the customer seperate from the consuting rate?

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Great question. The short answer is, yes, travel expenses are to be paid by the client; however, they are NOT part of your consulting rate. Your consulting rate is completely independent of travel expenses.

      As far as setting your rate, I’ve found it best to always tie my pricing to the value the client will derive. Hourly rates are OK starting out, but you’ll reach a ceiling effect, and won’t be able to charge more than $X/hour eventually, which puts a limit on your revenue.

      Instead, it’s far better to separate your time from your pricing–that way, you can earn far more revenue, and your revenue can be less dependent on your time.

      • KM

        Could you elaborate the difference between hourly rate and ‘pricing’ as you mention it here? How can I dictate my price outside of using an hourly rate?
        Great post!

        • http://www.StartMyConsultingBusiness.com Greg Miliates

          Sure thing. An hourly rate is one way of pricing your consulting services. However, there are other ways of pricing your services which can allow you to earn more revenue and/or increase your effective rate (your effective rate is how much revenue you earn divided by the # of hours you worked).

          For example, nowadays, I price most of my consulting work on a per-project basis. So, if I price a project at $3,000 and it takes me 10 hours to do the work, my effective rate is $300/hour.

          I’ve also found that since clients don’t care how many hours it takes you to achieve a result, invoicing them with all your time entries actually makes it more work for them. They feel the need to review your time entries, etc. Instead, I invoice them with a single line item for the project.

          So, hourly and per-project are 2 ways to price your services. There are other ways (monthly retainers, daily or weekly rates, revenue sharing agreements, etc.), but generally, moving away from hourly rates will typically earn you more revenue–and motivate you to work more efficiently.

  • Suleman Bacha

    Thanks for such informative article. I was looking for the very same advice which I think you generously provided. I’ve a question. I was working with an environmental consultant group for two years. Now I have left the job and trying to begin my own business/consultancy set up. I am also thinking about some other options such as to be freelancer service provider to a variety of firms, say “individual consultant”. What do you think is the best option for me and what implications could I bear for both? Thanks

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Thanks for the question. If I understand correctly, it sounds like you’re struggling with whether you should go out on your own or as a subcontractor for other firms. Unless you already have clients and consulting work and/or have a big cash reserve to pay your bills while you build your business, you’re nearly always better off starting your business on the side, part-time, while you have a day job that pays your living expenses.

      For your situation, it’s probably going to be quicker to get subcontract work from other consulting firms. However, as a subcontractor, you’ll generally earn less and have less control than working independently.

  • TheCosmopolitan21 .

    Nice page Greg and very good advice, thanks!

    • http://www.StartMyConsultingBusiness.com Greg Miliates

      Glad to hear it was helpful!

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