How to Set Your Consulting Rates

There are several ways you can determine how to set your consulting rates and fees.

There really is no right or wrong way to go about this – as long as the result has you being paid what you feel is fair and that it is sustainable to grow your business.

The worst thing you can do as a consultant is undercharge. The exception here is if you’ve just become a consultant and want to get your feet wet. In that case, taking on some lower paying work to establish yourself, build a client list and test your skills is a smart move.

However, in most cases you don’t want to undercharge as clients will naturally undervalue your services. The more you charge, the great perception clients will have of the value of your services.

Settle down tiger. Before you get all giddy and go jack up your fees to the moon be sure that your fee is set in a logical way. So without further ado let’s get into this…

The Consultants Status Quo
One of the easiest ways to get started in consulting to figure out what prices other consultants are charging and decide upon your fees accordingly.

By doing this you’re instantly positioning yourself as ‘one of the consultants’. This can be a good standard to get going with, but a dangerous one – as you never want to lump yourself in with all the rest.

Set your annual Salary Goal
In this case you figure out what you want to make this year. If you were a company employee what would you make?

If your goal is $80,000 you take this number and divide it by the number of hours you have available to work each year.

To get this number you take the 52 weeks we have in a year. Subtract vacation time, stat holidays and sick time and what you’re left with is usually about 45 weeks. And you spend about 40 hours a week working.

So 45 weeks x 40hrs of work = 1800

New consultants will often go ahead and take this number and divide it by their goal salary. In this case it would be 80,000 / 1800 = $44.44 would be your hourly rate.

BUT there is a huge issue overlooked here. You won’t actually be working for your clients for 1800 hours a year.

Why? Because you need to spend time on marketing, administration and the general duties to run your consulting business.

So here’s what you do. You’ll probably end up spending 50% of your time on actual client work. So right away divide your 1800 hours by two. Your new total is 900 hours of billable work.

So you’re left with 80,000 as your goal salary / by the 900 hours of billable work:

80,000 / 900 = $88.88 an hour

So what this tells you is how much you need to work and at what fee to be able to hit your goal of $100,000 salary.

If your goal is lower, your fee will be lower. If you want to spend less time but make the same amount of money, you’ll need to raise your fee. This is a sliding scale to give you an idea of how to set your fee.

Another note here is not to forget any overhead expenses you have. If your annual overhead is $10,000 (rent, phone, internet, supplies, etc) you’d take this number and divide it by the number of billable hours. In the above example it would be $10,000 / 900 = $11.11

So you’re previous rate of $88.88 (which might be a great rate if you’re working with Chinese companies) would now be 88.88 + 11.11 = $99.99. Round that off and your ‘real’ hourly rate is one hundred big smackeroos.

If you didn’t understand my last sentence above, that would be an hourly fee of $100.

Using a Project Fee
You can move away from hourly work and into a project based fee structure. In this case you will need to determine how many hours you feel the project will take.

I’d recommend adding an additional 50% or so to the expected hours you think it will take to complete the project. This allows for administration of the project and overflow. Adjust this additional percentage as needed.

The fact is, even with project fees you still need to know what your hourly fee is so that you can estimate what it will take to complete the project.

Daily Consulting Fee
Some consultants also prefer to bill by the day or half-day. There’s nothing wrong with this approach and you’ll still need to know what your hourly fee is so that you can calculate your daily fee.

Getting Paid For Results
Some consultants despise this set up and others love it. So here’s the nitty-gritty on performance based fees.

First, how it works. You work your behind off for your client and they pay you nothing. Until that is the sales start rolling in as a result of your work, or a deal gets closed that you played a role in. When that happens you then receive a percentage of the money that is generated.

You should only use the performance structure to be compensated if you feel comfortable with the client. ie, you have worked with them before. They are enjoyable to work with, they pay on time, and most important you feel you can trust them.

Once you have all that, then you can move to the performance based fees. In the long-term this set up can mean alot more money in your bank.

In fact, direct response copywriters work on this set up quite often. They receive an initial sum of $3,000 to 10,000 or more, depending on their track record, and then they receive money for every piece that they wrote which is mailed. The result, when they have a winner, is huge profits for months if not years.

There is no ‘best solution’ it all comes down to what you feel would work best given yoru situation and that of your client. Whichever you choose be sure to use a contract or simple agreement so both sides are clear on the terms.

If you set your consulting fees using a different method than the above, I’d love to hear about it.

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  • http://www.rwrightsystems.com Richard Wright

    One very important point you didn’t discuss, which catches many new self-employed individuals by surprise is the impact of taxes. People who work for a paycheck are accustomed to the employer withholding social security taxes and income taxes, and neglect to consider that when they are self-employed, they will need to cover these taxes themselves with estimated payments. This comes out of the fees you charge, so if your target is $80,000, 12.5% of that will be needed to cover self-employment taxes (social security), and at a modest effective tax rate of 15%, you will need to plan for at least $22,000 for tax payments. Consider whether your target income is before taxes, or after taxes, and adjust your hourly rate accordingly for 27% to 35% for taxes, allowing for state income taxes if necessary.

    • http://www.consulting-business.com Michael Zipursky

      Richard – great points you bring up! A reminder to everyone that you should speak with an accountant to find out the details of what taxes and laws apply to you and your business.

  • Angela Lussier

    Michael,

    How about setting fees for things like 1 hour or half day workshops? I do a lot of these and I know a lot of consultants charge different rates depending on whether or not the workshop is one of their core presentations or specific to that audience. Any comments on this?

    • http://www.consulting-business.com Michael Zipursky

      Angela, great question. There’s no magic number. If the workshop is for a client that can afford to pay big dollars then go big. Many consultants charge 2,000-5,000 for workshops. You can also run this as a per person charge, say $50-$100 each. Big names can get $10,000 and up for each presentation they get.

      However, if you’re giving these workshops as a lead generation tool to find clients you can often afford to make less up front as you know you’ll get a few clients each time you put one on. That being the case, you can even offer the workshop for free.

      Think about how much time you’ll need to put the information together, deliver it, communications, etc from start to finish. So if it’s not a lead generation type workshop, be sure that you’re getting a good return from it and charge appropriate fees.

      If you ask for too little you’ll be devaluing your brand.

  • Angela Lussier

    Great! Thank you.

  • http://tendaijoe.com Tendai Sean Joe

    Impressive .I will use this for my new business in South Africa

    • http://www.consulting-business.com Michael Zipursky

      Tendai – glad you found it helpful.