I have a quick question. I know a consultant who is going to do some work designing a company's program for high-potential employees. The consultant has talent but not much experience. What hourly rate would you consider low, fair, too high? Can you ballpark this for me?
Although the question is brief, a helpful answer is not. Pricing consulting services is notoriously difficult, particularly for self-employed consultants. You need to consider the real and perceived value of your services, expertise, and experience, as well as geography and market conditions. Several factors need to be considered:
Clearly there isn’t an easy answer to Louis’ question, but it's possible for his friend to compute some quick, rough estimates for a reasonable billing rate.
There are lots of ways to price your work, including an hourly rate, a fixed price for the whole project, a day rate, a retainer, and even blended rates (for example, a lower rate for working from home than onsite). Most consultants, especially when just starting out, tend to use an hourly rate because it’s the easiest to figure out and there’s less risk of undercharging, especially if the work takes a lot longer than you thought it would.
Here’s the most common way to figure out a range of possible billing rates. Once you have the range, go back through the list of factors above and tweak it as necessary. I've nicknamed this the “2x 3x Estimate.”
First, identify how much you would be paid if you were a salaried employee at a corporation, including bonuses. Use websites like Salary.com or Indeed.com to get estimates. (Reference: Seven of the Best Salary Information Websites.) I recommend using these sites even if you just left your corporate job because it’s possible you were underpaid. Cost-of-living increases may not have kept up with market salaries.
Next, divide by 2,000. This is roughly the number of working hours in a year. Then multiply that number by 2, 2.5, and 3. This will give you a range of billing rates.
The rates may seem high at first, and they’re likely to seem high to your prospective client. This is because as a self-employed consultant you are a business, not just a hired worker. Your billing rate has to cover business insurance, operating expenses (internet, phone, website/email hosting, bookkeeping), and most importantly, self-employment tax (the employer's half of Social Security and Medicare taxes). Your rate also has to cover the non-billable time you spend doing proposals, contracting, invoicing, marketing, business development, and even your vacation time.
Tip: Use a billing range, not one rate
Knowing your range and your desired target rate within that range is helpful for two reasons.
First, it establishes your floor or “walk-away" rate. Knowing this is important so you aren’t tempted to take a project that will be a bad use of your time. Remember, your rate needs to cover your business expenses and unbilled time. Moreover, if you take a project that pays less than your floor rate, your attitude will be affected, which will affect the quality of your work.
Second, quoting a range instead of one rate can be a useful negotiation tactic. It leaves room for compromise (that you’ve planned for). For example, I used to tell clients: “My rate ranges from $185 to $225 an hour depending on the scale, complexity, and duration of the work.” A client never offered to pay the low end of the range, nor the top end either. That was OK though because I was aiming for the midpoint anyway. I was happy, and the client believed they were getting a good deal.
Bottom line: Do your homework, understand what goes into computing a consulting billing rate, run some numbers, and be confident! If you missed it, I strongly recommend my earlier blog post, Quoting Your Consulting Billing Rate with Confidence, for more useful tips.