Let’s break down the different consulting fee structures that are available to you as a consultant, and then contrast and compare the positives and negatives of each.
Hourly Billing for Consultants
A very common one is hourly billing. A lot of consultants use hourly fees, and that’s really where a lot of people get started. That’s the status quo for people now.
What’s good about hourly fees?
They’re easy. It’s pretty easy to figure out how much you want to make and then what you should be charging on an hourly basis. Based on how many days you’re going to be working — so on and so forth. This helps you come with an hourly fee that makes sense for you.
However, there are many problems with hourly billing. Number one, there’s not a good way to work truly well with a client on an hourly fee. Because your interests aren’t aligned with the client’s situation, they’re not going to want to bring you in and share new ideas with you as much or ask you to do something that might be beneficial for the project because they know that every time they ask you, you’re going to be charging them more.
If you can create in 10 hours a result for a client that is worth a million dollars, you can find that there are many situations where you can charge $10,000 or $50,000 for a very short number of hours.
The clock is always ticking for you as a consultant. You always have to be thinking about tracking your time. You might find yourself actually wanting to slow the project down a little bit or take your time a bit more because the longer that it takes, the more that you make. There’s not a good alignment between you and the client.
The other big problem is that there’s a ceiling. You can only make so. You can’t create more time of the day and the only way to make more is to work more, create more hours, more money — and that’s creating another job for yourself. With hourly billing, I’m not creating much freedom and flexibility — which is what most consultants want.
Consulting Daily Rates
The next is a daily rate. A lot of consultants and a lot of consulting firms use a daily rate. The positives, again are that it’s easy because a daily rate is just your hourly rate times the number of hours per day. Some consultants might use a daily rate of a thousand dollars, $1,500, $2,000, $3,000, or whatever the number is. As you gain more experience and expertise, you can deliver in more volume and more results.
The problem though with a daily rate is the same as the problem with hourly. You could only earn more by working more days, so you’re working more hours, you’re working more days, but again, more means more hours. There’s a real ceiling for growth.
The only way around this is if you start working and bringing in other consultants, and then you’re charging at a certain daily rate and capturing the margin between what you’re paying them and what the client is paying you. Doing that requires obviously more resources. You have to start managing other people, and if you don’t want to do that, then the daily rate is definitely not a good one.
A lot of consultants will use a daily rate because that’s what buyers of consulting services know. Many are used to paying based on a daily rate or an hourly rate, but just because many are used to it doesn’t mean that it’s the right approach for you to take. In fact, I would certainly suggest against it.
Another model is retainers. And this was one that in my early days I really liked as a consultant.
Using retainers, because there’s ongoing income coming, it’s not a onetime project and it provides a sense of stability. It makes you feel that things are going over a longer period of time and you’d have to search for that next client as quickly, and that’s definitely a good thing. It’s what we could call stable income.
However, if we’re really honest about the situation, it’s only stable for as long as the client pays you after a certain period of time, they may decide to stop and then it’s not stable anymore, but the real problem with retainers is that what most consultants find is as you continue working with the client over a longer period of time, they start to treat you less like a consultant and more like an employee. You start to find that your role within the organization becomes more challenging because your expertise isn’t valued to the same degree.
You end up either being asked to do a whole bunch of things that aren’t really related to your core expertise. Or, on the flip side, you are almost asked to do nothing. And so then you find that your value as a consultant in that organization is decreasing.
A retainer can still work very well when you set it up as more of an advisory type of retainer as opposed to a work type of retainer, meaning that you’re providing is more of your knowledge, your expertise, your insight as opposed to going in and doing work.
For many consultants, an advisory type of role or retainer can still be very profitable. The nice thing about retainers is that when you’re working in an advisory capacity is not tied to the number of hours. So we can say that the positives and the negatives is you become almost like an employee or treated as an employee — and your value decreases over time.
Many consultants find that it’s not a bad thing, right? You can work with a client for a few months or years in some cases in a retainer model and have a lot of success with it, but you will start feeling over time that it’s just the value is decreasing.
Another structure is project-based fees. Now, project-based fees is a really good direction and option for you to take. The problem with project-based fees is that most people do it wrong. Most people when they think we’re a project based fee, what they’re really doing is just calculating the number of hours involved in that project and then creating a proposal around that. Projects are nice because you think of what a typically means a bigger budget.
And in your mind, it’s not hourly, but what I continue to see a lot of consultants do is that they’re project-based fees are actually doing it on an hourly basis. Then there’s still a cap. There’s still that ceiling.
ROI-Based Fees for Consultants
A slight variation on this is what I called ROI based fees. These are still projects where you go in and you take a client through either a specific phase or stage of a project or you do the complete project for them.
Whether it’s big or small, the value in ROI based fees is that it’s based on the ROI and the value that you’re providing to that client within that project. Your compensation is not based solely on how many hours you spend working on that project, but if you can spend 10 hours and create a result that somebody else may provide (but takes more hours), you can receive that same level of compensation a much shorter period of time.
There’s a great benefit not only to you but also to the client because they start to experience the result and the outcome. They get the result in a much shorter period of time.
So the ROI based approach, the positive is that you have a lot more leverage. If you can create in 10 hours a result for a client that is worth a million dollars, you can find that there are many situations where you can charge $10,000 or $50,000 for a very short number of hours.
If you were to break down into what an hourly fee would actually be, there’d be almost no one other that would want to pay an organization.
We don’t feel comfortable paying thousands of dollars per hour, but if you do it based on ROI and value, you’re actually able to achieve that because you get the client to be focused on the real outcome and the value for them in the ROI that they’re going to see which makes it a positive investment for them and an easier decision.
So the positive is leverage. The positive is high value. The negatives of it are that some people see it as being difficult. It’s only difficult when you don’t know how to approach it. If you know how to ask the right questions in a conversation, if you know what to look for, if you know how to structure your fees in a way that aligns with the ROI and supports value, it’s not difficult.
How to Charge Based on ROI for your Consulting Projects
You need to know how to do it right, so you can look for the right resources — or you can come to Consulting Success.
We have a lot of resources that talk about how to structure your fees based on ROI and value. This is work that we do want on a very close one to one basis with our clients and our coaching programs. There’s a lot of resources that we have on the site that can guide you in this direction. There is no one best way.
I would highly recommend that most consultants go in this direction. Using a retainer-based model certainly has some merit to it in some situations, but there is no right.
If you’re happy working more hours and knowing there is a ceiling that awaits you, that’s totally fine.
Why would you do that when you could earn significantly more with a lot more leverage and work fewer hours, make a lot more money, make a real impact for your clients, and enjoy the freedom and flexibility that comes with it?