The best tips for how to set and negotiate consulting fees
No matter what type of consulting business you operate, deciding how much to charge clients can be a tough balancing act.
If you set your consulting fees too high, you risk pricing yourself out of the market. If your rates are too low, clients might undervalue your knowledge and skills and hire a competitor instead. You might also find yourself in situations where a client is seeking to negotiate your consulting rates and fees.
Either way, your business will suffer if your fees don’t hit the sweet spot, and you may have a difficult time turning a profit or even keeping your practice afloat.
While there is no right or wrong answer when it comes to how much consultants charge, consider the following tips to help you continue to win new clients and grow your business.
Common consulting fee structures
First, it’s important to think about how you want to bill clients. The three most common consulting fee structures are:
- Hourly rates
- Project-based fees
- Monthly retainers
If you’re an independent consultant and new to the field, your first instinct might be to choose one pricing model for all clients and projects to avoid headaches with invoicing. Consulting experts recommend a more flexible approach to your pay rate based on the situation.
For example, if you’re working on a project with shifting priorities and moving timelines, it may make sense to charge by the hour. On the other hand, if a client offers you a job with a more specific scope and predetermined milestones and outcomes, you might choose to bill them for the entire project.
If the scope of work entails being available on an as-needed basis, consider charging the client a monthly retainer where you’ll perform a certain amount of work for a specified amount of money upfront, or for a daily rate. While working on a retainer is frequently more demanding, it also provides a regular source of income.
Of course, determining whether to charge a flat rate, project fee, or hourly market rate is only part of this equation. You also have to figure out what kind of income you’ll need and what the market will bear.
Strategies for setting your hourly consulting rates
There are several approaches you can use in determining how much to charge clients for your consulting work. New consultants will be less likely to charge as much as those with a higher level of experience, as companies may be less willing to hire beginners for a consulting project.
For this reason, it’s recommended to consider the following factors when setting your hourly consulting rates.
Your competitors’ rates
Research what other consultants in your industry charge their clients by the hour and use that as a measure for setting your own fees. You can likely find some information about competitors’ consulting rates online or through your LinkedIn connections. Industry trade groups and associations within your field may offer some insight on this, along with networking at industry events.
Your historic rates or salary
If you’ve been in business for a while, use the consulting fees that you have charged past clients as a general guideline, and perhaps modestly increase them periodically. If your consulting practice is relatively new, you can use your former salary as a general gauge of how much you should charge per hour or project.
Your specific expertise
Consultants who have established a track record of consulting success on particular types of projects or working in specific industries may be able to increase their rates based on their added value.
For example, if you are a marketing consultant who specializes in helping telecommunications businesses execute hyperlocal advertising campaigns, you can potentially justify charging a higher rate when you are hired to work on a similar project.
Check with headhunters
Recruiters, headhunters, and staffing agencies that specialize within your field can be a tremendous resource for figuring out what the market will bear, as well as help find potential clients. Keep in mind that any staffing firm who finds work for you will take a percentage of your pay for setting up the deal.
Use a full-time salary as a guide
One way to determine your rates as a consultant is to figure how much you’d earn at a full-time job doing the same kind of work. Online job boards like Indeed, Glassdoor, and the data compensation company, PayScale, allow you to research salary data based on job titles and location.
To convert a salary to an hourly rate, simply divide the annual figure by 50 (52 weeks minus two weeks of vacation), then divide that weekly figure by 40 to get the hourly wage. Of course, this hourly rate does not account for the benefits that full-time employees receive. On average, employee benefits account for more than 30 percent of a full-time salary before taxes.
The cost of benefits for yourself, plus your small business insurance, will likely be more expensive for your consulting firm than those of larger businesses, as those companies can benefit from certain tax advantages and economy of scale.
One rule of thumb you can use to determine how much to charge customers for your services is to take a full-time employee’s hourly rate and multiply it by three.
Determining how much to charge for project-based consulting fees and retainers
Setting your fees based on individual projects can be a bit trickier than simply quoting an hourly rate. You’ll have to determine how many hours a project will likely take and multiply that by your hourly rate.
Setting monthly retainers can be even more difficult as you’ll need a good estimation of the kind of work you’ll be doing and how much time your client will require. Some clients might not be aware of how often they’ll need your services, while others might underestimate their needs to try and negotiate a lower fee.
One option would be to specify how many hours you can offer a client each month in exchange for an initial fee, while any additional work would be billed at an hourly rate. Some consultants will discount their initial fees to attract clients, while specifying that any additional work beyond the agreed number of hours would be billed at a higher rate.
How to negotiate consulting rates with clients
Even after setting your consulting rates and fees, your clients may try to negotiate these prices with you. Here are some strategies to help you be ready for negotiations:
Know how low you're willing to go
Before negotiations begin, determine how low you’re willing to go with your rates. Your client may be worried that you won’t be able to deliver on what you promise because of trends in the industry or a poor experience with a previous consultant, so ensure them that you can back up your claims, and be firm in your negotiations
Have a strong understanding of the job
You should have a strong grasp on exactly what a particular job entails, the length of the contract, and the skills that you or your team will need to successfully complete the project. This knowledge will enable you to make sound negotiations. For example, you may agree to accept less per hour for a longer contract because you won’t have to be constantly looking for more work.
Be creative in negotiations
Rather than negotiating your rate, you could also negotiate the scope of the project; that is, what you have to do. For instance, if your customer doesn’t have the budget to do everything they want to do, then you could offer to do less with the budget they do have.
Remember, you're in the driver seat. You shouldn’t let your customers dictate the scope or cost of a project.
When negotiating your consultant rates with your clients, it’s important to be honest and upfront with them. However, this honesty doesn't just pertain to money. You also should be transparent about the process and the amount of work required.
Once you and the client agree on a price, then stick to it. Going over budget could potentially be construed as a breach of contract, and you might open yourself to a lawsuit.
Consider your expenses when setting and negotiating consulting rates
Remember that as a self-employed small business owner, your consulting fees need to cover more than just your salary. Expenses to think about when establishing and negotiating your rates include:
Even if you’re working remotely most of the time, you’ll need to pay for internet service, and if your computer or mobile phone dies, you’ll have to replace it out of your own pocket. If your consulting business is large enough to require office space, you will need to account for monthly rental payments.
Although some clients might reimburse you for travel expenses, there’s no guarantee that they will. If you expect clients to pay for work-related travel costs, specify that in your contract.
Whether your consulting business has full-time employees or if you need to frequently hire contractors to help with specific projects, you will need to pay them for their work.
Experienced consultants may have grown accustomed to paying for their own medical insurance, but newcomers to the field might not consider how much healthcare premiums can impact their bottom line.
Like any business, consultants should purchase insurance to protect themselves. Consultants typically acquire general liability insurance to cover injuries to clients or damage to their property, as well as professional liability insurance to account for work mistakes or missed deadlines that could lead to lawsuits.
In some cases, consultants might also need workers’ compensation and commercial auto insurance policies depending on state laws.
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