How much should you charge for your services? It’s a question that plagues every freelancer and consultant, especially when starting out. On the one hand, you don’t want to turn your clients away screaming. On the other, you need to pay the rent. How so you find the right rate to make everyone happy?
Why Figuring Out Consulting Rates Is So Hard
Industry averages can represent a huge range because they encompass workers who charge super-low rates as well as A-listers who charge an entire year’s salary for one project.
For example, take a look at the pay range for a marketing consultant in the US, as calculated by PayScale.com:
Depending on the industry you serve, level of experience, and whether you’re a full-time or part-time consultant, your total pay can be anywhere between $34,760 to $154,281.
While finding a fee that works for you within that range may feel like pinpointing a needle in a haystack, the good news is that you have a lot of room to grow. And if you follow a few basic guidelines, determining a consulting price that’s fair for you and your clients is easier than you think.
In this consulting business price guide, we will get into the nitty gritty of how much to charge. But before we break out the calculators, there are a few myths about consulting fees we need to clear up.
Myths That Keep Consultants From Charging Fair Rates
Myth #1: The more you charge, the better you are.
Fact: Your “worth” is not tied to your hourly rate.
Too many consultants get tied up in whether they are charging what they are “worth,” as though you can put a price tag on talent or self-esteem. Assigning a dollar amount to your ego is a road to disaster. You will constantly compare yourself to others in an unrealistic way. Depending on your personality, this mindset can lead to never thinking you measure up (imposter syndrome) or artificially inflating your abilities and coming across as incompetent when your work fails to impress (Dunning-Kruger effect).
Pricing services isn’t about the value of a person’s time (our time is irreplaceable and priceless). It’s about what your customers are willing to pay for your level of skill, quality of service, and the results you can deliver.
Myth #2: The less you charge, the bigger your competitive advantage.
Fact: If you want to make a sustainable income, don’t sell your services based on price.
We live in a global economy. What a freelance designer needs to charge in San Francisco to make ends meet is vastly different from what a designer needs in Manila. The person in San Francisco will probably never be able to beat the person in Manila on price, nor should they try. Focusing on beating your competitors on price can open you up to a race to the bottom, selling your services based on price rather than value.
That isn’t to say that price isn’t a determining factor as to whether a client hires you, and we’ll discuss more of that in a moment. For now, just keep in mind that the lower your fee, the more work you’re going to have to do to meet your income needs. Unless you have a sustainable, scalable process that you can mass produce, that just means you’re one step closer to burning out.
Myth #3: It’s rude to ask prospects about their budget upfront.
Fact: It is impossible to propose a fair rate without understanding a client’s budget.
People get squirmy when they have to talk about money. They may worry that they’ll be seen unfavorably if their budget is tight (See myth #1). They may be wary of you charging more than you normally would if you know they have plenty of cash to work with. But the simple matter is, to avoid wasting the time of both parties, and to have a better understanding of your market, you need to know how much your prospective client is willing and able to pay.
Myth #4: Just come up with a dream salary and then do the work to make it happen.
Fact: Your rate isn’t just based on how much you want/need to earn. It’s also about realistically growing a business.
Some guides may advise you to arbitrarily create an income goal and then calculate how much work you need to do to get there. If it were only that easy! Life and business don’t work that way. There are risks and costs involved in running a business (and being human) that you have to factor in that have nothing to do with your ability to complete work or sell products.
Now that we’ve busted some myths…let’s do some math.
Figuring Out a Rate to Keep Your Business Humming and Your Bank Account Full:
1. What base salary will you need to bring home?
Calculate how much you’ll need to earn, regardless of whether you’re working for yourself or someone else.
First, add your monthly living expenses
- Rent or mortgage
- Bills – Utilities and groceries
- Communication – Cable, internet, phone
- Debt – Any loans and credit cards
- Lifestyle – This covers entertainment and discretionary costs like eating out, travel, clothes, gym, salon, etc.
Next, take a look at how much you want to set aside for savings on a monthly basis:
- Emergency savings – This is an account that gives you a safety net in case you can’t work due to illness or other unforeseen circumstances. Most financial advisors recommend having 6-12 months of salary saved in this account.
- Retirement – Think about what you want your annual retirement contribution to be. This calculator can help you find how much that should be.
- Large purchase savings – Will you need to buy a new car in the next year? Do you dream of buying a vacation home? Determine how much per month you need to save up to make it happen.
Add in expenses typically covered by an employer:
- Insurance – Depending on where you live and the availability of national health care, your employer may be responsible for providing health insurance. According to data gathered by eHealth, in the US the average health insurance cost for single coverage premiums in 2018 is $440 per month. For family coverage, the cost for premiums in 2018 is $1,168 per month.
Add it all together, factor in taxes, and multiply by 12!
This total gives you an after-tax, monthly salary needs approximation (i.e., what you will bring home monthly). To calculate your before-tax salary needs, simply add a minimum of 20% to your total number.
2. How much does it cost to run your business?
Your fixed costs include any monthly or annual expense that doesn’t change, no matter how much business you do.
- Office space – Are you renting commercial property or using a coworking space? Consider rent, maintenance, cleaning, and utilities.
- Initial outlay – What equipment/furniture are you purchasing to get started? This covers computers, communications, and furniture.
- Insurance – This can be for yourself and anyone you employ, including health, disability, life, and liability insurance.
Your variable costs are expenses that fluctuate depending on your level of productivity, efficiency, and growth.
- Supplies – The more work you do and people you employ, the more supplies you’ll need.
- Shipping and postage
- Employee and contractor wages
- Vendor contracts (including software subscriptions)
- Marketing and advertising
- Affiliate commissions
- Accounting fees
- Legal fees
- Client entertainment
- Professional development
- Professional organizations
Okay. Once you calculate all your business costs, add the total to your salary needs.
Now you have a number to shoot for that will help you break even. But you’re not doing this to break even! You have a business to build. That means it’s time to determine your profit margin.
3. What’s your brand value?
When retailers set prices for products, they take into consideration the costs of making the item, along with the perceived value of the brand. Brand value can mean the difference between a pair of Nike Air Jordan 12 OVOs that sell from Foot Locker for $225 and a pair of Nike Air Jordan 12 OVOs that sell for $100,000 because Drake may or may not have signed them. They’re essentially the same product and serve the same purpose, but the story behind the shoes increases their value.
The same goes for your personal brand as a consultant.
Earlier we talked about how your worth as a human being shouldn’t be tied to how much you are able to fetch for your consultancy fee—that’s still true. Your personal brand has nothing to do with whether or not you’re a good person. In fact, as we’ve seen in the news, some pretty terrible people can get away with charging hundreds of thousands of dollars for a single speaking appearance.
People aren’t willing to pay exorbitant amounts of money to work with or learn from someone who is nice. They pay for what that expert can do for them.
This is the hardest number to come up with because your perceived value as a consultant can vary depending on your industry, who you’ve worked with, and the return on investment you’ve proven you can deliver.
With that in mind, here are some ways to put a number to your brand value:
Talk with past clients or previous employers about results they’ve gotten/how much more they’ve made after working with you.
Ask them if they’ve tracked any financial gains from the work you’ve done for them or the problem you’ve solved. If yes, determine how much they paid for that service and see what kind of return on investment (ROI) they got from hiring you.
If they haven’t determined an ROI, be sure to get this information from your future clients.
When you discover the average return on investment you deliver, you can more confidently propose a fee in line with their financial goals and turn away people who aren’t willing to invest.
What kind of training or certifications do you have?
The more skilled and knowledgeable you are in areas of expertise, the more your service is worth. Give yourself a 1% raise for each course that you take that helps you upskill.
How many years have you been in your industry?
If you’re an industry veteran, you have less of a learning curve than a newbie, have a more established framework, and can anticipate and navigate common problems that affect the delivery of results. Add another 1% percent to your salary for every five years you’ve worked in the industry or have been consulting.
What proof do you have that you can deliver results?
Start collecting testimonials and case studies with documented results that will help you sell the value of your service. Give yourself a 1% percent raise for every case study you have documented.
Now you have your target income! Yay!
Okay, so now we have to figure out…how can you get there?
Calculate Your Base Hourly Rate
Your base hourly rate is how much per hour you need to pay yourself to reach your target income, regardless if those hours are spent doing client work or back-office work like marketing and invoicing.
Assuming that you’re working 40 hours per week, you can calculate this number by dividing your monthly target income by 160.
Calculate Your Billable Hourly Rate
Since your working time will not be solely dedicated to client work, calculate how much clients need to pay you per hour so you are still getting an income in return for your non-billable time.
Divide your monthly target income by how many hours per week you dedicate to billable client work.
There you have it. A consulting business price guide to meet your target income. Now that you have this number, you have a dollar amount to base your fees off of, regardless of how you get paid: By the hour, the day, the project, or even by the activity.
So How Do You Want to Get Paid?
This is a controversial topic among freelancers and consultants! Everyone has an opinion and the right answer will vary based on industry, preference, maybe even client.
Easy to track time on tasks: If the value of your work is in completing tasks that your client doesn’t have time to, by all means, charge them by the time you spend working on them. There are also certain tasks or clients that have a tendency to balloon in terms of time needed. Billing by the hour ensures you don’t get stuck working overtime with little to show for it. Hourly billing is common among highly skilled professionals like accountants and attorneys.
It limits your earning potential: When you charge by the hour, you can only reach your target income by either charging more per hour or working more hours. As one person, neither option is sustainable. At some point, your market will refuse to pay your hourly fees or you will run yourself ragged taking on more hourly work than you can actually do—and then your reputation goes down the tubes.
Many consultants work out their needed hourly rates but charge by the half-day or day, depending on how their clients engage them.
- You’re getting a flat fee, so if the job doesn’t take as long as you anticipated, you’re still getting paid the same amount to complete it.
- It’s easier to get clients because they’ll feel more secure knowing from the outset how much the job will cost.
- It gives structure to your finances, which is important when you’re first starting out.
- It ties you down to one job. Sometimes you can earn more money by doing a number of smaller jobs in one day, rather than just one job.
- It gives you less flexibility to leave the job site, say, to quote on other work, or if any other circumstances arise that means you have to leave the job periodically. It might not be convenient for you or others to make up extra hours at another time or extend your day.
- If a job runs longer than anticipated or is more specialized than anticipated, you could find yourself out-of-pocket or not getting paid as much as you could.
- If you run into a previously unforeseen problem or specialized area, it can be difficult to get the client to pay more than what you originally agreed on.
- You must quote thoroughly for the job beforehand, so you need to be experienced to ensure your quotes aren’t too low. Miss the target on your quote and you’re stuck with the bill.
If you understand how long it takes you to complete a certain project, it’s a simple matter of knowing how much you want to make hourly and multiplying that number by the number of hours it takes to finish the project.
The other way that consultants charge project rates is the value the service represents to the client. For example, some copywriters charge more for sales page copy than home page copy, since sales pages have a more direct effect on conversions.
Like day rates, you get paid the same whether or not you work all your estimated hours or not.
It’s hard to know how long it will take to complete certain work, and unless you have a hard and fast scope of work outlined, you risk doing more work than you allotted time for.
How to calculate
Multiply your billable hourly rate by the number of hours it will take to complete a project. You can also add fees relative to how quickly you’ll deliver it (rush fee) or the anticipated return on investment.
Some clients offer equity, royalties, or commissions based on the outcome of the project. While this has the potential to be lucrative if you work with high-ticket clients, you put yourself at risk.
This approach can offer potential to earn residual, passive income as the client prospers.
- You have no control of the outcomes. How are the clients measuring success and your contribution? Did they follow all of your recommendations?
- It can take months to see the results of your work, which can lead to big cashflow problems.
You Hold the Key to Your Financial Success
I hope this consulting business price guide has helped you. See it doesn’t have to be so scary! In fact, one of the most empowering things about consulting is the ability to set your own rate. When you have a method to do so, it gives you the confidence to quote, and earn, your price without apologies.
Have you ever undercharged for a consulting project? Tell us about it in the comments!