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.
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
- Calculate the consulting rate on which you will base your invoices:
- An hourly rate
- A daily rate
- A flat rate for completion of an entire project
- Some combination of the above rate structures
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.
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.
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.
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