As a consultant, setting your price for your services can be difficult. Should you bill by the hour? Use a value proposition? Negotiate a fixed rate? Avoid undervaluing your services by performing adequate research beforehand.

Calculating Your Rate

Calculating a competitive hourly rate starts with determining your desired salary. This requires performing research, as you may not be aware what your services and related salary are actually worth. Take into account your former experience, industry, and locations worked. Market research firms and professional organizations release information about average consulting salaries in different industries.

Next, add 35-40% to your desired salary amount to cover benefits like health and dental insurance. To determine the hours that you will spend performing consulting work, divide by two the amount that you worked as a salaried employee--about 2000 hours per year--to account for time spent running the business and marketing. This means that your ultimate hourly rate will equal the amount of your salary plus benefits, divided by 1000.

Remember that an hourly rate is not always the best option for a consultant. The consensus among consultants and other business experts is that having a fixed rate per project is preferable, as it keeps consultants’ and clients’ interests aligned, leading to the most efficient solution to the business problem. Consultants in certain industries such as IT or those who are less experienced usually opt for an hourly rate. According to Brian Conners, president of the Association of Professional Consultants, charging an hourly rate is often better for less experienced consultants because their customers might not yet feel comfortable committing to an expensive fixed price.

Using a Value Proposition

A value proposition is effective for experienced consultants in industries like management or strategic planning. It involves billing a client based upon the estimated value the consulting job will bring to the company. Harry Mills, CEO of Mills Consulting Group, explains that the first step is to detail the value of your services to your client’s company. This can be done—even without a specific idea of the project—by meeting with the client and providing an example of a past project that you completed which solved a specific problem and added value to that client’s company. During the meeting when you find out exactly what the problem is, you will be able to estimate the potential value of the solution and explain it to the client specifically. After doing more research, you can give a dollar estimate and make the sales pitch. Mills suggests a 5:1 value to price ratio, charging the client for 20% of the value created for the company.

Sources:

1. Career Lab: “How to Price Consulting Services” http://www.careerlab.com/art_consulting_fees.htm

2. David Maister: “Pricing Consulting Services” http://davidmaister.com/blog/594/Pricing-Consulting-Services

3. Management Consulting News: “Meet the MasterMinds: Harry Mills on Pricing Consulting Services”

http://www.managementconsultingnews.com/interviews/Mills_Interview.php

4. Forbes.com: “How to Set Your Consulting Fees” http://www.forbes.com/2006/11/06/bostonconsulting-marsh-mckinsey-ent-fin-cx_mc_1106pricing.html

5. Mid-Atlantic Consultants Network: “How to Price Your Consulting Services”

http://www.maconsultants.com/2009/03/30/how-to-price-your-consulting-services/