How to Price Consulting Services
by William S. Frank, President/CEO of CareerLab®
Beginning consultants often underprice themselves and go out of business. They divide their annual salary by 2080, the number of work hours in a year. For example, $100,000 divided by 2080 equals $48.00 per hour. The problem is, new consultants only bill half their time, say 20 hours per week. In addition, this formula neglects the cost of benefits, usually 35-40% of annual salary. If your corporate salary is $100,000, your total compensation is roughly $140,000 (base salary + 40%).
Therefore, when figuring your consulting rate, you should always include the cost of benefits, like this: $140,000 divided by 2080 equals $67.00 per hour. Then you double this number to compensate for unpaid time doing such things as administration, customer service, entertaining clients, sales and marketing, and proposal writing. Now your hourly rate is $135.00 per hour—something sustainable you can live on.
“Gulp,” you say. “That’s awfully hard to ask for.”
When I launched my consulting practice in 1978, I charged $15.00 per hour with the guarantee that if you didn’t like the meeting, you wouldn’t have to pay. I’ve gradually raised rates to $300 per hour today—with the same guarantee.
How do you ask for a lot of money?
As you know, everyone likes to feel they’re being treated fairly. Everyone loves a deal. I’ve often positioned my rates like this: “My normal rate is $75.00 per hour, but because you’re a friend of a friend (or it’s the holidays, or you’re on a tight budget, etc.) I’ll do it for you for $50.00.” Without exception, people appreciate this gesture of savings and don’t dispute my fees. The same principle applies to large projects. Just structure your pricing accordingly.
It’s important to benchmark your rates against the market. Obviously, you can’t charge $135.00 per hour if the going rate is $75.00.
Package or project prices are generally better than hourly time and materials charges. Why? Because if you complete a $5,000 project in 10 hours, you’ve earned $500 per hour, not $135.00 per hour—your usual rate. Over the years, I’ve completed several $10,000-$20,000 projects in just a few hours. You’ll need those big hits occasionally to stay in business.
Consulting often involves getting a client, delivering service, then finding another client. That sequential model of client after client creates the feast or famine income that consulting is famous for. It’s a catch-22: while you’ve consulting you can’t be selling, and while you’re selling you aren’t generating cash. How do you reduce the up-and-down cycles and even out your income?
One way is to establish “anchor clients.” You’re familiar with the idea of anchor stores in a shopping center—big companies like Nordstrom or Sears who “anchor” the center and make it profitable. Smaller stores contribute revenues but are less essential to the project’s financial success.
In a similar way, consultants can secure “anchor clients,” large ongoing projects that deliver revenue month after month. One or two significant anchor clients can keep you in business and even out your cash flow. It’s almost like having a job while still being independent. If you work ten hours per week for one organization, and five hours per week for a second company, you’ll have time left over for smaller, one-time assignments. You’ll control both your time and your own destiny.
That’s the beauty of independent consulting.