One of the most important (and most difficult) tasks to complete before launching your new independent consulting business, is to determine how you will charge clients for your services and of course, how much to charge.
Calculating and setting your consulting rates is a task best broken down into bite-sized chunks, as there are quite a few things to be considered.
Why Getting This Right Matters
Before we get into the mechanics, I want to be honest about something. Figuring out how to calculate your consulting rate is probably going to feel uncomfortable. Most people I work with either undervalue themselves significantly or—less commonly—set rates so high they can’t win any work at all.
The thing is, your rate isn’t just a number. It signals to clients what kind of consultant you are. Price yourself too low and potential clients may actually trust you less, assuming there’s a reason you’re cheaper than competitors. Price yourself too high without the track record to justify it, and you’ll struggle to get meetings.
I knew a consultant once, a guy who’d spent twenty years in procurement for a mid-sized manufacturer. Genuinely knew his stuff. When he went independent, he set his daily rate at roughly what he’d been earning per day as an employee. Seemed logical to him. But he hadn’t factored in the days he wouldn’t be billing—the marketing, the admin, the gaps between engagements. Within six months, he was earning less than he had as an employee while working considerably harder.
That’s the trap. And it’s why working through this methodically actually matters.
Take it Step-by-step
It can be a good idea to work through the decision-making process in the following series of three sequential steps:
- Determine the basis for your consulting rates.
- Decide whether you will charge:
- An hourly rate
- A daily rate
- A flat rate for completion of an entire project
- Some combination of the above rate structures
- Calculate the consulting rate on which you will base your invoices.
Now let’s take a look at each of these steps in a little more detail.
1. Determine the Basis for Your Consulting Rates
Before you even begin to think about fee structures or calculating actual rates, it’s important to decide what factors will drive them. If you don’t complete this step, you will probably find it very hard to make much progress with steps 2 and 3, and you even risk setting a rate that’s inappropriate.
There are at least three methods you can use to set your consulting rates.
You could set a rate based on your business plan if you have created one.
This is a fairly simple method, in that you will have done a lot of the legwork when you put together your business plan, (which for example, should already include documented projections of your business expenses and profit margin).
You can otherwise choose to base your rate on your desired personal salary or to research and calculate the average market rate for your specific consulting niche and use this to guide your service pricing.
Honestly, I’d recommend doing all three and then comparing the results. If your desired salary requires a rate significantly above the market average, you’ve got a decision to make. Either you need to find ways to differentiate yourself that justify premium pricing, or you need to adjust your salary expectations—at least initially.
2. Decide How to Charge
Once you have decided on the basis for your consulting rates, you should determine how you want to charge your clients. This is something on which every independent consultant seems to have a different opinion, and you’ll find plenty of articles extolling hourly, daily, or fixed project rates as the best way to charge.
Rather than add to that debate, I’ll simply point out that each has its pros and cons and that as an example, my own Logistics Bureau consulting firm typically offers clients the choice of paying a daily rate, or a fixed fee for an agreed project scope-of-work.
The takeaway here is that you don’t have to choose just one way to charge. What’s important though, is that if you offer your clients a choice, you need to get comfortable with estimation, administration, management, and invoicing techniques for each charging method you offer.
3. Calculate Your Hourly Consulting Rate
Regardless of whether you bill your clients by the hour, by the day, or with a fixed project price, it’s essential to calculate an hourly consulting rate. You must fix a price applicable to every hour you spend working on your clients’ behalf, since an hour is the unit you will use to bill hourly, calculate a daily rate, or to provide a fixed price quote or proposal.
When working out how to calculate your consulting rate at the hourly level, there’s a rough formula that’s worth keeping in mind. Start with your desired annual income. Add your estimated business costs—insurance, software, marketing, professional development, all of it. Then divide by your realistic billable hours.
And that last bit is where most people go wrong. Realistic billable hours is not fifty weeks times forty hours. You won’t bill every hour you work, and you won’t work every week. Between marketing, admin, holidays, illness, and the inevitable gaps between projects, many independent consultants find they’re billing somewhere between 1,000 and 1,500 hours per year when they’re reasonably established. Newer consultants often bill considerably less.
Run the numbers with that in mind, and you’ll likely arrive at a higher hourly rate than you initially expected. That’s normal. That’s also why learning how to calculate your consulting rate properly is so important—gut instinct tends to steer people low.
Don’t Forget Your Homework
In future posts, I’ll provide some hints and tips to help you complete each of the three steps described above. Step 1 though, is fairly self-explanatory and once you have chosen the basis for your consulting rates, you will probably have some homework to do. You will need for example, to research consulting market rates or calculate a personal salary that’s realistically achievable, but won’t put you into financial difficulties.
The most important point to note from this post is that by following a methodical, step-by-step approach to setting consulting rates, you can avoid falling into the trap of charging unrealistic fees.
The sequence of steps also helps to simplify the rate-setting process, which for many new independent consultants proves to be one of the most difficult start-up activities.