Deciding how much to charge as a consultant can be a daunting task. After all, many people don’t like to talk about money, and it can feel awkward to do so with clients. For most consultants, determining the value of their services becomes tied up with ideas of self-worth, which makes the issue deeply personal.
But setting pricing and fee rates is necessary. There’s also a big advantage to it: it lets you decide how much you are worth, giving you the kind of independence that is very rare.
Setting up a consulting pricing strategy is an essential part of having a consulting business. It can be a rewarding experience that benefits both consultants and clients alike by establishing clear guidelines and expectations around pricing and fees.
This article on consulting fees and pricing will provide you with a guide on how much to charge as a consultant. We will discuss the key aspects of developing a consulting pricing strategy: how to determine your value, calculate consulting fees, decide on the right pricing model, and communicate effectively with clients.
How Much to Charge as a Consultant: Value & Pricing
Knowing how much to charge as a consultant depends on getting the pricing right, which in turn has a great deal to do with knowing your value as a consultant. Here are some key tips to help you decide on the best pricing strategy for your consulting business:
Know your value: Understanding your value and that of your business is not just about having a firm grip on your finances. You have to take into account your years of experience, your education and training, and your professional background. At the same time, ask yourself why clients wish to work with you. What skills and services can you provide them with that they can’t get anywhere else? Part of your value to your clients is measured in the time and money you save them as well as the increased efficiency and competitive edge you give them.
Decide on your workload: Having your own consultancy business means you get to be your own boss. That also means you get to decide what kind of workload you will take on. This will have a huge impact on your pricing rates. Taking on a project for a client that may stretch out over several weeks or even months can put huge pressure on your time and resources and may end up bringing in less per hourly rate than smaller projects within shorter time frames. On the other hand, one big project can give your business greater financial security than several smaller projects. Whatever you decide on, it’s important to have a clear sense of the workload any new project will involve before making any decision on the pricing.
Attract the right clients: You have to choose what kind of clients you want to work with when deciding how much to charge as a consultant. A smaller hourly rate, for example, will be more attractive to clients with fewer financial resources. Large corporate clients or wealthier individuals, on the other hand, will not be turned off by higher rates provided you have the expertise and experience needed to justify those rates. If you set your rates too low, you run the risk of coming across as if your services are of low quality. Setting your rates too high risks pricing out potential clients. You have to decide on the right balance that best suits your interests and goals.
Avoid underselling yourself: Some consultants may be tempted to offer a low rate in order to attract the largest potential number of clients. Doing so, however, risks undervaluing their services. Your confidence in your skills and experiences should be reflected in your rate. Don’t undersell yourself. Remember, some potential clients might mistake low rates as an indicator of lack of experience, which can end up undermining your business.
Focus on your cash flow: Simply put, the right pricing strategy is one that allows you to have a positive cash flow. It’s vital to keep costs and expenses in mind when deciding on what rate to charge, especially if you are committed to your consulting business for the long term. Take a look at your business and personal expenses, and calculate how high your rates need to be to cover those costs. If you have plans for expanding your business, are your current rates enough to provide you with the necessary profits to grow?
Take a look at the competition: Beyond assessing your own skills and experiences, you will need to consider the rates offered by competitors in your industry. It’s a safe assumption that your clients will have looked at several of your competitors when doing their research, and you should keep track of your competition for that reason. That way, you will have an awareness of the going rates and can adjust your own pricing accordingly. Be realistic in comparing yourself to competitors that may be more established and have greater resources. Keep in mind, however, that you should highlight all the factors that make you stand out from your competition and settle on a rate that does justice to your level of expertise and experience.
Manage your expectations: Adjusting rates as your business changes and grows can be especially tricky because you always have to think one step ahead. That’s where managing your expectations comes in. Consider the current financial health of your business and decide what kind of rate changes will be needed, if any, in order to realize your goals. You might have to hold off on big changes if the market conditions are not favorable. On the other hand, you might adjust your pricing to take advantage of changes in the competitive landscape that can help you grow your consulting business. It all depends on your ability to adapt to changing market conditions as quickly as possible.
Pricing Models, Payment Methods, and Consulting Fees
Calculating consulting fees depends on the kind of pricing models and payment methods that you choose. There are several payment methods that consultants can choose from, and different methods and pricing models might work well for different kinds of clients. Having a flexible pricing structure with different methods and models can be useful in attracting and retaining a wide range of clients. Here are the main payment methods and pricing models:
Charging for your consulting services at an hourly rate is especially useful if the work involves many meetings and in-person consultations. For consultants with previous experience working in salaried positions, the 2x or 3x hourly method can be especially practical. Essentially, the consulting rate is calculated by taking your current rate and multiplying it by 2 or 3. An hourly rate of $35 for example means that your consultancy rate should be $70 or $105.
Why? Because as a consultant, you are responsible for covering expenses such as health insurance, sick days, and office space and equipment that your employer would normally cover.
Another way to calculate your hourly rate is using the 50 or 52-week method. You take your annual salary–with or without 2 weeks of vacation–and divided it by 50/52 weeks and then 40 hours. The result will be your hourly rate. To estimate your consultancy rate, you mark that up by 50% for example to account for additional expenses such as health care and thereby arrive at your consultancy rate. The exact consultancy rate will be different based on your own salary expectations and expenses.
Many consultants charge based on a per-project rate. This approach has the advantage of improving your workflow and removing any worries you might have about tracking hours. There are certain challenges to using a per-project rate, however. A project can easily take much more time than anticipated, leading to a rate that comes out to less per hour than an hourly rate would have. Newer consultants in particular can easily underestimate the scope and complexity of a project.
As well, increasing efficiencies and higher productivity can actually lead to less income from a per-project rate due to shortened completion times. On the other hand, the greater your experience completing projects, the better your sense will be of how much work certain types of projects will require. That, in turn, will allow you to come up with a per-project rate that accurately reflects the amount of work you put into completing a given project.
In order to calculate a per-project consultant rate, it’s important to define and limit the scope of a project from the start. Based on your experience, skills, and resources, you will be able to arrive at an estimate of how much time and effort it will take to complete a project. For newer consultants, using industry averages or seeking advice from more experienced consultants will be especially helpful.
Monthly Retainer Rate
Charging a retainer fee means that you will be receiving a monthly fee from a client while working with them in the capacity of a consultant. The monthly fee would be for a certain number of hours or to cover an agreed-upon set of tasks. The best advantage of using a monthly retainer rate for consultants is that it provides with them a steady source of income.
Monthly retainer fees can be implemented after the initial stage of a project, where a consultant can use a per-hour rate or project rate at the start. The monthly fee is essentially a way for clients and consultants to keep the working relationship going and devote additional time to improving a project or updating it as required. This type of rate is particularly suited for certain consultants such as graphic designers or IT consultants.
Communicating with Clients
Many people don’t feel comfortable talking about money, but consultants have to perfect the art of negotiating a deal and setting rates. This is a conversation that has to happen with every client. The key is to speak on your own behalf and in defense of your consulting rate as clearly and confidently as possible.
It’s important to remember that different clients have their own preferences, and that negotiating with some will be easier than with others. Some clients may have extensive experience working with consultants, while others will seek you out as their first consultant. Your responsibility will be to research your clients in advance and get a clear sense of their needs, and be willing to listen and negotiate when needed.
The most important discussion point with clients is the size, scope, and complexity of the project. The pricing model and rate will depend on the nature of the project, so getting all that information from the client will be crucial.
Keep in mind that you are ultimately your biggest advocate. Speak with confidence in discussing your experience and expertise, and explain why you have the credentials to justify the rate you are proposing for the project. At the same time, it might be useful to compromise if that means taking on a client who will prove a valuable connection in the future.
Finally, it’s important to be very clear with your clients about your preferred payment methods. A contract will lay out the nature of the work and should contain a clear description of all the necessary payment details. Invoices are an integral part of consulting, and a popular way for consultants to charge their clients. Consultants should look for software that can allow them to issue and keep track of invoices in an efficient manner.
Insurance for Consultants
Insurance may not be foremost on the mind of consultants when they think about how much to charge for their services, but it should be. The truth is that having the right business insurance coverage is an integral part of protecting the financial health of your consulting business.
For small consulting businesses in particular, a single lawsuit can be detrimental to the future of the business and even lead to bankruptcy. With the right insurance coverage, you are free to pursue projects without worrying about the potential liabilities of running your business. Consultants should consider the following insurance policies:
A business owners policy (BOP) is a package of insurance policies that are needed by most businesses, especially small and medium-sized firms, including consultancies. A BOP frequently includes important policies such as commercial property insurance, general liability insurance, and business interruption insurance.
Commercial property insurance helps protect your business against asset losses. This policy should be considered by any consulting business that leases or owns office space, manufactures products, manages inventory, or leases equipment.
General liability insurance provides protection against claims of injury related to your business and responds to claims of negligence made by a third party. It can also provide you with legal defense and with the necessary resources to keep your business going even if you are involved in a lawsuit.
Business interruption insurance is a policy that helps replace lost income and other expenses in case a business is forced to temporarily close due to a covered peril affecting its commercial property, such as natural disasters or theft.
Professional liability insurance is also known as errors and omissions (E&O), professional indemnity, or malpractice insurance. This type of insurance protects you and your business from civil lawsuits for negligence, common mistakes, omissions, misrepresentation claims, and other issues.
Cyber liability insurance is essential for any business or consulting firm with an online presence. The policy protects businesses against such events as cyber-related security breaches and ransomware attacks.
Overview: How Much to Charge as a Consultant
The process of choosing how much to charge as a consultant can feel overwhelming, but it can be a rewarding experience that allows you to measure the true value of your work and business. Ultimately, choosing the best rate is something that will depend on your own needs and goals. What matters is having a clear understanding of all the options available to you, and being willing to make necessary changes and adjustments as your consulting business grows.
With time and experience, and with the right insurance protections in place to safeguard your business, you will be able to adjust your rates as needed and take advantage of the freedom that comes with being a consultant.
To learn more about policies that meet your business needs, check out Embroker’s digital insurance platform.