If you ask any consultant, freelancer, or other "gig" worker what the hardest part of their job is, most will likely say "pricing my services."
Determining the value of your services is often tied up in your own self-worth, making this conversation even trickier for most people. For example, if you’ve worked as an employee for the last 30 years and never made more than $50 an hour, it might seem inconceivable that your services are worth $100 an hour.
You might think that charging too much will put you out of business before you can even hang your shingle. However, there may actually be more danger in charging too little. Let’s dive into the psychology of pricing — along with the different methods and factors to account for when calculating your own prices.
The Dangers of Charging Too Little
Ask any business person worth their salt and they will tell you,"The first sale is to yourself."No, you don’t have to buy your own product or service, but you do have to buy into your ability to deliver it.
If you don't believe that you have the qualifications, skills, and talents to live up to the promises you're making, clients will smell your insecurity a mile away. Confidence is essential. It may take some time to build up that confidence, but be wary of undervaluing your services as you build that belief in yourself.
Why is that the case? Well:
- If you charge too little, potential clients won’t see you as a "bargain," they will see you as an "amateur."
- If you don’t value your services, your clients won’t either. They must have skin in the game to get the most out of what you offer them.
- You'll undervalue the industry as a whole. Yes, your lack of confidence could make it more difficult for another consultant to make a fair living.
- If you offer to do a job for less than you’d like, you will end up resenting the client, the project, and yourself.
If you need to build your skill and confidence as a new consultant, consider offering a "Beta Program" for people you already know, making it perfectly clear that you are in the process of learning and you will be charging more once you’ve got a few clients under your belt.
If there is a cause you support, you could even consider donating your time to a nonprofit or charging a nominal fee in order to build up your portfolio.
How Much Is My Service Worth?
Let’s say that you’ve worked through all the mental junk and are confident in your ability to deliver results. You're good at what you do and know that you bring value to your clients. The question becomes, "How do I figure out what my service is worth?"
If only it were that easy.
People have been led to believe that goods and services have an inherent value — but they don't. Pricing comes down to two parties agreeing to a specific number.
That number can be as high or as low as those parties accept. If you're a business consultant who wants to make $10,000 a day and you find a client who is willing to pay $10,000 a day, you’ve just determined the "value" of your service.
In reality, the more important questions in regards to pricing are, "How much are people willing to pay me for my time?" and, "How much am I willing to accept for my time?"
This can be a delicate balance between making sure your needs are met and not pricing yourself out of the sale. You may want to make $100 an hour, but your potential client is only willing to pay $10. Do you undervalue yourself to get the job or walk away and find someone who is willing to part with $100 to see their desired outcome?
There is one more factor to consider that makes this a bit easier. It’s called the "Market Rate" and refers to the range of pay that the average customer or client will pay for your service. It doesn’t dictate what you can charge but provides guidelines as to what you’re most likely to get.
Keep in mind, if the average consulting fees are around $100 per hour, your experience and track record will need to be taken into account. If you are a brand new consultant, you may be charging closer to $50 or $75 per hour.
With 20 years of experience under your belt, you may be charging $150 or even $200 per hour. One other thing to note: While you may be a new "consultant," if you’ve spent the last 30 years in this specific industry as an employee, you have plenty of experience. Don't shortchange yourself.
Let’s take a look at the different methods you can use to create your pricing structure.
How to Set Consulting Fees Per Hour
Let’s begin with one of the simplest ways to charge — hourly. We spoke earlier about how it can be difficult to charge $100 if you’ve never made more than $50 per hour. Consider this, what else was included with your $50 an hour paycheck? You likely received:
- Sick days
- Vacation days
- Health Insurance
- An office to work in and all the equipment you needed
- Leads on potential customers if you worked a sales position
Your employer footed the bill for all of that. As an entrepreneur and consultant, you’ll be paying for your own benefits, buying your own computer and workspace, and no one will be paying you to go on vacation. You’ll also spend at least half your time (in the beginning) tracking down new clients rather than working billable hours.
It makes sense that you should charge more, but why should your client be willing to pay more?
If they were to hire you or someone else to provide the service you are about to provide, they’d be paying for all of those things out of their own pocket (not to mention Unemployment Insurance). Paying you more to not be an employee actually saves them money in the long run.
With all of this in mind, how do you calculate a good rate for yourself?
Consider what you were making at your last job. If you know the hourly rate, you are ahead of the game. If you don’t, use this equation:
Annual Salary divided by 50 weeks (the number of weeks in a year minus 2 for vacation) divided by 40 hours (the average number of hours worked in a week).
Example:$100,000 per year/ 50 = 2,000/ 40 = $50 per hour
Now that you’ve got your hourly rate, double it or triple it. That’s your consulting rate. Charging project-based fees is another consulting fee structure you can utilize.
How to Set Consulting Fees per Project
Charging per hour definitely has its benefits, but there is one definite downside to this fee structure — the better you get at your job, the less you make. As you become more efficient and faster at the work you do, you’ll actually be penalized for your expertise.
That's not why you went into business for yourself!
This is especially true when your projects are very similar to one another. Perhaps you set up businesses for people, helping them create the foundation of their enterprise.
Maybe you create websites or develop marketing plans — no matter what you do, you’re bound to get better at it the more you do it. You could raise your hourly fee to compensate, but clients may have a hard time swallowing the higher hourly rate.
Instead of frightening your client or taking a pay cut, you can charge by the project. You know approximately how much time it will take you and how much you should make. This can become your project rate and make quoting much easier. Here’s a formula to help you figure this out:
(Estimated hours of work + a 20% cushion for the unexpected) X Hourly Rate = Project Cost
This allows you to make what you deserve and gives your client the security of knowing they won’t be hit with a brutal invoice.
How to Charge Based on ROI
Rather than say “how to charge based on ROI,” we need to discuss “whether you should charge based on ROI.”
For a new consultant, the idea of getting paid a percentage of what you bring in can sound wonderful. It also sounds like something that a business owner should jump at. After all, if you don’t do a good job, they don’t pay you very much. Sounds perfect, right?
Wrong. If a business knows that you are going to deliver results and they are going to increase their revenue by around $100k, would they rather give you a hefty percentage of that revenue or find someone who will deliver the same results for a (significantly lower) fixed rate?
Obviously, they’re going to look for the best value for them. If you find a business willing to agree to these terms, they either don’t have the money to pay you upfront or lack faith in their follow-through to implement the steps you advise them to take. Either way, they aren’t the type of client you want to work with.
If you have a history with the client and full trust in them, know how to track the ROI, know that they will implement your solutions, and believe they will pay you in a timely fashion, charging based on ROI may have a lucrative payoff.
When to Charge an Initial Fee Plus Monthly Retainer
This strategy may prove to be the most successful and easiest to implement for consultants of every experience level. It includes a two-part fee structure. First, you charge an initial "setup fee" which covers the cost of beginning a consulting relationship. Then, you charge a monthly fee to cover ongoing consulting work.
This not only makes the cost of consulting easier for your clients to handle but also sets you up for an ongoing stream of revenue — so you don’t face every single month wondering whether you’ll bring in the work necessary to cover your bills.
How Much Should I Charge as a Consultant?
Now that you understand the different methods of setting your consulting rates, and have seen the average fees of several different industries, it’s time to figure out how and how much you will charge.
This will take some time and some tweaking before you find the sweet spot in pricing. You may find that your price is scaring off potential clients. This either means that you are charging too much or that you haven’t identified your ideal customer yet. It could also mean that you aren’t communicating your value properly.
You may find that you have more clients than you can handle. This might suggest that you have priced your services too low and need to increase them.
No matter what situation you find yourself in, you have the ability (and the right) to adjust your fees accordingly. It’s time to create the business you want, delivering value while making a good living.