How to Set Consulting Fees
Moving from a paid employee to a professional consultant can be daunting and exciting. As you invest in business equipment and marketing, you must sit down and calculate what you will charge your clients. Choosing a fee structure for your business requires you to look at factors like arithmetic, competition, expertise and industry. Learning to set your rates also means avoiding some of the mistakes beginning consultants often make. For example, most new contractors tend to set their rates too low, making them hard to raise in the future. Find out how to set consulting fees.
1. RESEARCH THE COMPETITION
Consultants are extremely wary about giving their rate information to people, because they don't want to be undercut by new consultants with lower prices. However, there are other ways to do some research.
- Ask friends and family who use consultants in your industry what they have paid for these services. They may not be able to tell you the exact services, but they can give you an idea of what they look for and at what price.
- Use a mentor or professional network to ask people in different but similar markets what they charge. If someone is a consultant in a different state, they may be willing to share industry knowledge. Keep in mind that people on the coasts or in cities can charge 25 percent more than in other areas.
- Sign up for a consulting session on a business mentor site like PivotPlanet. During these paid sessions, you can ask successful consultants in your industry the tough questions, such as rate setting and service package options.
2. EXAMINE DIFFERENT CONSULTING FEE STRUCTURES
You can price by the hour, the day, by project or with a retainer.
- Most beginning consultants use a daily rate or hourly rate structure. If you don't have a package of services set up, this may be the best way to start until you get a better idea of what your clients will want. IT consultants and social media consultants usually charge by the hour.
- Other consultants use a project-based rate. This requires you to know the details of the project very well and have a good understanding of your own efficiency. Marketing, public relations, web design and graphic design often charge by the project. If you have to supply something and it isn't heavily dependent on other parties, this can be your best option; however, there are some risks to doing this. If the project gets delayed by the company, or they ask to completely redo it, you can find yourself with a low hourly rate or being unable to bill.
- Some professionals, such as lawyers, CPA and financial consultants keep a retainer. They project an hourly rate and how many hours the project will take and ask the client to pay in advance. This is an excellent way to guard against potential non-payment; however, a retainer is hard to sell in some industries like writing, marketing and customer service.
3. CALCULATE YOUR HOURLY RATE
Once this is settled, you will be able to calculate projects and retainers from this figure.
- Find your pay information from your most recent salaried jobs. Determine what your hourly wage was by dividing your weekly/bi-weekly payment by the number of hours you worked in that time.
- Figure out your new consulting hourly rate by tripling this number. Consultants must base their rate on their wage plus expenses and administration of running your own business. When you triple your wage and round up to the nearest multiple of 5 or 10, you should have a reasonable rate for providing for all 3 of these payments.
- If you work in a consulting field that has very low overhead, you may need to charge double the hourly wage instead of triple to remain competitive, while still covering your wages and expenses. Internet-based work from home jobs might fit into this category, if you do not have employees.
- Compare your calculated rate to those of your competitors. If your doubled or tripled hourly rate is in the range you found during your research, then it is likely you can move forward and decide whether you want to offer project or retainer rates.
- To figure out your daily rate, multiply the new consulting hourly rate by the number of hours (around 8), that you will work on the project. Some consultants also offer half-day rates.
4. CALCULATE PROJECT RATES
Do some research into past jobs to see how long certain projects tend to take. Try to find 5 to 10 different projects, take an average of them and then multiply the average hours by your newly set rate.
- You may be tempted to undercut your competitors with a lower project-based fee. Keep in mind that many businesses identify higher cost with higher quality. If you set your fees high, you can always negotiate a little lower, but it is hard to add to your project costs for repeat customers.
- Make detailed notes about what is included in the project, so that you can compare like for like. You will need to return to these notes when starting to set the scope of your projects.
5. CALCULATE YOUR RETAINER
If a company wants a number of projects in a month, quarter or year, you can sit down and calculate what amount of time you will be setting aside to work on their projects. If you cannot judge by a project basis, then decide how many days per week you will work for that company and multiply your daily rate by that number each month you plan to work.
6. ADJUST YOUR FEES FOR EXPERTISE
If you can advertise that you are a forerunner of your industry, you can charge more. The following are good indicators that you can raise your rates slightly:
- You have written a book. In this case, you have taken the time to evaluate the industry and provide professional opinions. This makes you both a teacher and an expert. People will pay more money to have a consultant who is an author.
- You have been consulting in some capacity for years. If you are starting a new consulting business, but you can prove that you have completed projects for 5 to 10 years, you can place yourself on the high end of the fee spectrum.
- You have moved to a new area. If you have moved from the suburbs or a rural setting to an urban location, increase your rates by around 25 percent. If you are moving away from an urban location, reduce your rates by around 25 percent, even if you are an expert. Your rate is based on cost of living as well as expertise.
- You have a number of big name clients. If you do not have a non-disclosure agreement, then advertise the large contracts that you work with. Potential clients will assume that you are worth more if you are chosen by companies they recognize and respect.
7. ESTABLISH A PROCESS FOR SETTING A SCOPE FOR EACH PROJECT OR CONTRACT
If you are going by a project basis, you will need to be able to say "That is beyond the scope of the project," so that you are not offering services for free if a client changes their mind. If a client wants to change the scope, build in a renegotiation process so that you aren't doing work or you are not working on something for free.
8. CONSIDER FREE CONSULTATIONS OR FIRST-TIME CUSTOMER DISCOUNTSTO ATTRACT NEW BUSINESS
It is better to break into your consulting field by taking this 1-time hit in payment, than to set low rates. Your client will appreciate the discount, but understand when they are billed in full next time.
9. THROW IN A FEW EXTRA, NON-BILLED HOURS, TO GIVE THE CLIENT ADDED VALUE
You want to be able to bill at the higher rate, but if you feel that you want the client to be extra-pleased with your work, you have the freedom to bill for fewer hours than you worked. It is not a good idea to do this very often, but it is better than setting a low figure at the start.
10. INCREASE YOUR RATES SLIGHTLY FOR VERY SHORT-TERM WORK
You want the client to see the value in employing you on larger projects, so raise your rates for small projects, and then offer to discount them if you take a larger role.