This is one of the first challenges you will face, once you have set up your consulting business. What you charge will depend on several factors. These include your area of consulting, your experience, reputation, and skills.
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Research the market for your services
Find out as much as you can about who would want your services. How much are consultants doing the work that you want to do charging?
Also, look into how consultants charge for their services. You can charge your clients using several different methods, such as charging by the hour, by the project, or you may be hired on a retainer. You may use value-based or return on investment billing for your services.
You don’t have to use the same method of charging for your services as your competitors, but it does give you an idea of what is familiar to your prospective clients.
Whatever method you use to charge your clients, it is helpful to start with an estimate of what you would charge by the hour. You can then estimate the time in hours it would take to complete projects so that you can calculate what you should charge. If you are offered a monthly retainer, a calculation of your hourly rate it equates to helps to assess whether it is a good deal or not. Calculating hourly rates can assist you to assess what you might charge using other methods.
Charge by the hour
If you don’t value your time, neither will others. Stop giving away your time and talents. Value what you know and start charging for it.
Kim Garst
Do an estimate of your hourly pay
For your first estimate, begin with what your earned in your last job. Search online to see the salaries offered for similar jobs. If you go into consulting, you should plan on better pay after your expenses than when others employee you in a regular job.
For example, if you earned $100,000 per year, you might make the mistake of expecting that all you need to do is divide your salary by 52 weeks = $1923.08, then divide by 40 hours per week = $48.08 per hour. Let’s call it $48 per hour. This would give you a big drop in your income. Why?
Your employer had overhead.
Now you do. They paid for your computer, software, phone, office space, utilities, and other expenses. They provided your benefits, such as health insurance, perhaps contributing something toward a 401K retirement plan, group life insurance. You may have paid premiums or contributions, but without the purchasing power of an organization behind you, you would have paid more.
During those 52 weeks, the leave time for vacations and public holidays would not decrease your pay if you use them. If you were sick for a week during the year, your salary would remain the same. If multiple people stop by and interrupt your work, your hourly pay does not change. The simple calculation would not include possible end-of-year bonuses.
As a consultant, especially in the beginning, you may spend half of the time looking for clients and consulting work. You may also perform non-billable work, such as invoicing your clients, doing your books, and other work. If you decide that you will take two weeks total off for vacation and sick leave, you would have 50 weeks to work (that is 40 hours per week x50 = 2000 hours). If half of your time is not billable, you would only have 1,000 hours left to earn a living. So your earnings would likely be 1,000 hours at the $48 per hour that you estimated you should charge, a total of $48,000 per year. That’s less than half of what you were earning when employed by someone else!
It’s worse than that. You now have to pay for your own equipment, software, internet connection, phone bill, and likely the services of a bookkeeper or accountant and lawyer (to review contracts).
What will your hourly rate be?
You may need to bill at 2.5 to 3 times the hourly rate you previously earned. You should be charging closer to $150 per hour rather than $48 per hour.
It is best, in most cases, to use the hourly rate to decide how much you should charge. You may use it to figure out how much to charge by the project or by other methods.
Charge by the project
You could charge by the project, but most people underestimate how much time a project will take. If your projects for different clients are quite similar, you may gain a good sense of how long they take. Then charging by the project becomes a good deal. As mentioned earlier, your hourly rate can help you estimate how much you should charge.
Billing is less time consuming because you don’t have to take don’t have to spend as much time tracking hours. Invoicing takes less time, because it is less detailed.
If you have developed a successful presentation, seminar, or similar product that takes a clearly defined time, you can charge a fixed amount for it. It could be a standard product that is useful for multiple clients.
Hired on a retainer
Being hired on retainer is attractive. Your client would pay you a regular amount monthly. It is even better if you receive an upfront fee or your first month in advance. For my first consulting job, the client offered a monthly retainer with a maximum amount for the year.
I turned down a retainer, because the work volume was not predictable, and they hired me at my hourly rate. Also, I thought from what they told me about their projects that I would be working substantially more hours than the retainer would cover.
The hourly rate that I charged was a bit above what they typically paid consultants, but not above their range. I factored in what we had paid consultants in my previous jobs, the 1,000 billable hours, and the considerations mentioned above to estimate a realistic hourly rate.
I’m glad I went with the hourly rate rather than a retainer. The projects and the client’s need for help rapidly expanded. We did not need to renegotiate the contract. So, they were happy to allow the hours billed to expand as needed.
As I was intricately involved in their projects, they knew that I was busy and they had a clear picture of the work I was doing. It worked out better for both parties. At the same time, I always make sure that my contracts do not restrict my work with other clients. I had other ongoing projects.
At a later time, for one client, I worked on a retainer paid monthly. Though, they made allowance for billing at my hourly rate, if the hours exceeded 10% of the number of hours per month in the contract.
As their projects continued to expand and new ones continually arose, it was a good deal. However, the preparation of invoices was tedious because the number of hours continued to expand and always required hourly billing.
Value based consulting or return on investment (ROI) consulting
“A nickel ain’t worth a dime anymore.”
Yogi Berra
Start by finding out what the client perceives as value
Photo by Kevin Malik
Those who favor value based consulting emphasize that it begins with establishing what the client regards as value. You estimate how much return on investment your client would make as a result of your services.
Offer the client options
Based on the perceived value to the client, you offer the client options for a high level of your involvement (all the bells and whistles), or a mid or lower level of involvement. These options range from the highest to the lowest price and are based on a percentage of the perceived ROI.
Advantages of the value based or ROI method
With value based consulting, the client can contact you at any time without feeling that they are paying an hourly charge. That’s also true for other methods of charging a fixed amount for your services. If it’s not an hourly payment, it is in your interests to complete all of your work as quickly as possible or comfortable.
Value based proponents say that hourly billing is not good. There are only so many hours a day, month or year. So, try as hard as you might, you have a built-in maximum income. Also, when you charge hourly, it is easy for clients to turn consulting into a commodity. There is a limit to how much you can expect a client to pay per hour. Value based fees are considered by many to be the most lucrative.
Value based consulting fans also regard hourly billing as unethical because it does not provide an incentive to complete the work as quickly as possible. With hourly billing, the longer you work on something, the more you would get paid. Though, it is ethical and in your best interests to get things done quickly when charging by the hour. Clients usually have an idea of what a reasonable time would be to perform the work. Also, if a client feels that you are overcharging, repeat business is in jeopardy.
Some disadvantages of the value based or ROI method
On the flip side, the work may be much more time consuming than anticipated. Then billing at a fixed price, such as by project or the value based method, the consultant may have to work at what would be a very low hourly rate.
It can be difficult as a beginner to accurately predict how much a client would gain from your services to develop a value based proposal. Also, you have to be sure that you can ascertain how much they actually benefited from your services after your consulting is done.
The suitability of the value based or ROI method may depend on your field
This method of structuring fees does seem best suited to areas such as business management consulting.
In research and development, many projects end because experiments or clinical trials have negative results. You might save your clients money by helping them to get to the answer more rapidly. It would be very complex in this area to do value based consulting, though not impossible.
Stock options and ROI
Some companies may give stock options to consultants in addition to paying the consulting fees. This can be to ensure that consultants remain engaged and have a vested interest in improving the return on investment. It seems that stock options are more often given in longer term consulting commitments. So it is sometimes possible to get a piece of the ROI while charging your clients without using value based consulting. This opportunity to obtain stock options can occur with established public companies and start up companies that have not yet gone public. In such a case, ROI may be difficult to estimate in the short term.
What method should you use to charge your clients?
Photo by KoolShooters : https://www.pexels.com/photo/girl-wearing-a-jacket-thinking-7327772/
This is up to you.
As you gain experience, you will find which method of establishing your fees will work best for you. Doing an estimate of what you need to earn to make a consulting opportunity worthwhile can just be a starting point. Often the hourly rate you would need to charge to make the project worth your time, enable you to cover your expenses, and make a profit is a helpful baseline. You can factor this into charging by the project, going on retainer, or as part of considering what you bottom line would be for value based consulting.
In the end, it is between you and your client.
There is a price below which you may not work. Also, a price for services exists above which your client will not hire you. Also, some clients have preferred ways of structuring payments and may prefer paying by the hour, the project, or a retainer. In your negotiations, it is important to focus on the client and understand their needs and expectations.
Your clients know that as a consultant you may be fulfilling a temporary need or solving a problem for the organization. Sometimes it can take a long time to bring a new employee on board. Your client might have lost an important staff member. You might be filling such roles. Your client may have no one in house with the expertise that they need for a limited time. When your job is done, then the contract ends. Consultants usually have contracts that can end with written notice by either side. For some clients, you may provide long term services using your expertise, because it is not feasible or does not make sense for them to hire a full time person to fulfill that role. In some cases, then, it is easier and it may be less expensive for a client to hire a consultant despite what seems to be a higher rate.
Are you still considering whether to go into consulting or have just made the transition? This site has more information on getting started with your consulting business and how to set it up to deal with money.
What are your thoughts?
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