How do you calculate your consulting rate? It's a question most W2 employees ask themselves when they want to become a consultant. How can you maximize today and prepare for a profitable consulting business in the New Year? Yesterday we explored how to upgrade your appearance, a process that goes beyond the oft-repeated advice to dress for success. Now, for today, we'll focus on pricing your consulting services, whether you are starting up your own independent consulting business or have your own business established already.
Find Out Your Bill Rate
When's the last time you evaluated your pricing strategy? Have your bill rates remained steady for the past several years? If your bill rate hasn't changed, then there's something amiss. You see, since you last calculated your rates, the world has changed, and so have you.
In the world, according to market forces and the vagaries of supply and demand, rates have changed. Some types of services have become commoditized and outsourced, and there may have been downward pressure. For other types of services, especially if you have a hot skill set, pricing per hour may have gone up.
And as for you, if you are still peddling the same skills you used to, consider the fact that you have more years of experience than you did in the past, and have solved a variety of new problems. It is possible you may be offering completely different services than what you started out with when you calculated your billable rates. And if you've picked up new skills, new certifications, or are now offering more strategic consulting services than in the past, you might be playing in a different ball park altogether.
What recalibrating your billable rates means is necessarily unique to your business and what services you plan to sell, but however you go about it, this is a good time to take an honest look and review your pricing strategy.
Types of Consulting Rates
Think beyond the single hourly rate -- it's not the only way to charge for your services, and may entrap you into an apples/apples comparison with the second and third worlds. Consider instead how you might want to have several different kinds of rates or prices for various aspects of work. You might bill more for strategic planning and discovery, and bill less for testing and Q/A, depending on market realities. As you create project proposals for your clients, they'll appreciate the idea that your strategic services are valuable and that you have something special to add to a project, and at the same time they'll thank you when you don't overcharge for more routine forms of work that could be done by any number of virtual workers.
Another consideration is to bid on fixed rate projects, with payments based on milestones and deliverables. This form of charging can be a two edged sword, but if you're solidly experienced with the types of projects you're proposing, then the risks can be worth the rewards.
Other options can including bringing in concepts of hybrid rates and retainers.
Calculating Your Billable Rate -- Three Methods
Figuring out how much to charge for your consulting services is more art than science.
Here at MBO Partners, we recommend THREE approaches (at least!) for calculating billable rates. No one method stands alone.
There is value based pricing, or calculating how much value you bring to a client and basing your billings on that figure. This bill rate calculation method is forever enshrined in the anecdote about the engineer who was asked to solve a manufacturer's problem. He waltzed in with a sharpie, drew an X on the component, and said, "fix this part right here." Later, an exorbitant invoice appeared for some $500,000. Astonished, the company asked the engineer to itemize and justify the invoice. An itemized invoice was sent, saying, "Drawing the X: $10. Knowing where to draw the X: $499,990."
Market based pricing looks at what others are charging in published industry rates. While there is some comfort in the clarity of this method, and it is the easiest to understand, generally these rates are commoditized in the global marketplace and will be the least favorable rates for the consultant. The rate is also boiled down to a single function being performed, say Java or HTML 5 programming. If you are providing consulting services that have intrinsic value beyond pure code slinging, then this rate can only provide a limited view. On the other hand, being armed with the information of what others are getting paid will provide perspective, and in some cases will provide the revelation that you are undercharging or being lowballed by an agency.
Cost based pricing, the final of the three methods we often talk about here at MBO Partners, is a nuanced view that takes into consideration the revenue you need to be making on an individual basis to have your business plan make sense for you. In other words, this plan factors in your overhead, desired amount to pay yourself and any other consultants you're engaging to work on the project, taxes, expenses, and so on. Of the three, this method is the closest to building an actual business plan, and will help you understand if your career is heading in the right direction (or not!). Just remember, the cost based pricing calculation is not by itself any reflection of the reality of what you can charge in the market place, and must be considered only in conjunction with market prices and the value you bring to your clients.
Discounting Your Consulting Services
TImes are tough, and we are still only barely emerging from the Great Recession. If you aren't booked with enough substantial engagements for the coming months, consider carefully whether you might want to offer limited term discounts. A new client special or a valued customer special could be just the thing to get a new project added to their 2011 budget, and fill your dance card for the year. Consider also the idea of a volume discount -- if the client will engage you for a longer time period, a larger fixed rate project, etc, then you can reward them with a discount on that basis. You win some better cash flow security, and they win some savings.
One caveat to keep in mind: avoid letting yourself get "locked in the basement" with perpetually discounted rates -- ensure that your agreement language allows for your normal rates to go back into effect. It might help to have a formal, published pricing document or brochure showing the normal pricing to make it clear that the discount rate is truly a special deal.
Only you know what is right for your business, so proceed cautiously (and pragmatically) when it comes to discounting.
Raising Your Billable Rate
Your rate analysis might reveal that an increase in rates is long overdue -- so now what?
Tread carefully with existing clients, and be prepared to explain and defend the value of your new rates or pricing formats for 2011. If you've done your homework -- not just on market rates, but on the value of this project for your clients -- then you should be able to calmly and persuasively explain your new rates, and how you will still be able to provide outstanding return on their investment in you.
If you get completely in a bind and your customer is threatening to not renew your contract at the new rates, then make the best decisions you can. Hopefully you've cultivated a pipeline of other opportunities and have tested whether the new higher rates are salable in the marketplace. If a client doesn't recognize the value you bring to a project, then you may want to "adjust your portfolio of clients" and let them attempt to find the same quality of work in someone cheaper. If you love the client, and the work is pleasant, then you may also decide to "grandfather" a client into old pricing for a fixed term (say 6 months). Sometimes a lower paying gig can still be worth it if the relationship is fantastic.
Raising your consulting rates is always a touchy subject, so do your research and be sure of yourself.
As a new independent contractor, you may not know how much to charge for your consulting services. Learn how to calculate a cost-based bill rate with this video tutorial.
How, when, and why you should consider raising your independent consulting rates.