One of the most frustrating parts of starting a consulting business is figuring out what to charge. Set your fees too high, and you can price yourself right out of the market. But if you set them too low, prospects might undervalue your service. Worse – your business may end up in the red.
Setting a fair price is an important part of any consultant’s risk management plan. After all, your prices determine whether you can pay the bills and keep growing.
We talked to
Daniel Feiman (@dsfeiman),
the managing director of the strategy, finance, and process consulting company
Build It Backwards, for price-setting advice. With 30 years of consulting experience to his name, Feiman knows how to set fees to maximize a business’s success.
3 Consultant Fee Structures to Consider
Before you decide on what to charge, think about how to structure your compensation. Typically, consultants choose between:
- Hourly fees.
- Project-based fees.
- Monthly retainers.
When you’re just starting out, your instinct may be to select one structure to keep invoices simple. However, Feiman suggests you pick the structure that suits the client and the job. “Hourly rates are usually for projects that are difficult to get your arms around,” says Feiman. “This can happen when the scope of work is unclear, yet to be fully defined, or in flux.”
On the other hand, if you want to charge by the project, Feiman says, “You have to work closely with the client to be as specific as possible about the scope, timeframe, milestones, and expected outcomes of the project so that it can be documented in the agreement.”
Feiman recommends reserving retainers for ongoing projects where you may need to be available on an as-needed or immediate basis. “Effectively, the client is pre-paying for both your availability and expertise,” he notes.
Fee Advice: Being flexible may mean more work for you, but it might show prospective clients you have a real grip on their specific needs. Take a good look at the desired outcome and structure your fees accordingly. And don’t shy away from a retainer. It may be more demanding on your time, but it can also keep cash coming in while you build your client base.
3 Approaches for Setting Consulting Fees
The next step is to set the actual dollar amount. Feiman identifies three approaches:
- Market pricing. Look at your competition's average hourly rate to determine your rates. This may be the simplest option, but you have to estimate the amount of time you could spend on a project if you want to charge a one-time fee.
- Historic pricing. Base your price on your previous fees plus a periodic pay bump. For a new consultant, that might mean figuring out your hourly wage as an employee and adjusting for self-employment taxes, consultant liability insurance, and other overhead costs (more details below).
- Value-added pricing. Quantify the value your services can bring to the project. You and your client determine how your initiatives will be measured and you receive payment for your performance.
Fee Advice: Remember your fees need to cover more than your salary. They should also account for:
- Office expenses. Even if you’re working out of your home, you need to pay for supplies.
- Travel. Getting to and from clients costs money. Budget for it and include it in your fees.
- Taxes. Your employer used to pay a portion of your taxes, but now that full burden is on you.
- Contract workers. Sometimes you may need to hire experts to do what you can’t.
- Consultant liability insurance. Much of your work includes offering professional advice. Consultant liability insurance can help pay for legal expenses when someone claims your advice or work was negligent.
Cash flow can be a big problem for consultants, and being smart about your fees is one way to make sure you can pay your bills and your salary. Another way is to keep clients coming in. Learn how to attract more clients in “.”