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Quote Your Billing Rate with Confidence
By Liz Steblay, PICA Chief Advocate
It takes practice to quote your consulting billing rate with confidence. The tactics in this article will help if you bill by the hour or by the day. There are other ways to bill for your talent and expertise but those will be covered in another article that is still being written.
Benchmark to know your rate is reasonable
There are lots of ways to do this. Talk with other consultants, do a web search on typical management consulting rates in your city or state, or participate in a PICA Q&A event or roundtable (available to PICA members). Alternatively, try a back-of-the-envelope calculation to convert your employee salary to an hourly rate. Simply divide your total compensation (salary + bonus) by 1,000. Warning: this calculation may be low; it's possible that your salary didn't keep pace with market rates, especially if you were with the same employer for many years.
Figure out your market rate
If you’ve ever subcontracted to a firm or found work through an agency, they probably billed the client 25-40% more than what they paid you. So if the agency paid you $125 per hour, the client probably paid $155 to $175. This is your market rate. This is what clients are willing to pay for you!
Quote a range instead of just one rate
I did this for years with terrific success. I would tell the client that my rate ranged from $185 to $225 an hour depending on the scale, complexity, and duration of the work. Surprisingly, no client ever offered to pay me the lowest rate; maybe they didn’t want to seem cheap. Ninety-five percent of the time we agreed on a rate in the lower quartile or midpoint (usually around $200 per hour), which is what I was actually hoping for; I quoted my range with that in mind. Of course, I would have loved to get paid at the higher end of the scale, but clients like to think they are getting a good deal. As a side note, I was once paid at the top of my range, which brings me to my next point.
Consider the client's urgency and other options
The one time I billed at the top of my range, the client’s multinational project was already halfway through its lifecycle and nothing had yet been done related to my area of expertise. I could hear the anxiety in the program director’s voice and his stress was palpable. At the end of our meeting, I didn’t quote the range. I said I could do an assessment, strategy, and plan in three to four weeks and my rate was $225 an hour. He said, “How soon can you start?” In retrospect, I probably could have gone even higher since the other consultants on the project were from a major firm. My rate probably seemed cheap to him.
The point is, pay attention to the clues and ask outright where they are in the project lifecycle. Ask if the budget has already been approved. What’s been done in this area so far? Is there already a consulting firm involved that you’ll be working with? (Remember, even your higher rate will be cheaper in comparison.) It can be awkward to ask if they are talking with other candidates or agencies but sometimes you can figure this out when you ask about next steps.
Besides cost and urgency, also think about the client's other options in terms of knowledge and experience. If you have worked with that company before, you are worth a lot more to them than someone who is unfamiliar with the players, culture, structure, and politics. You deserve a rate that's even higher than a consultant from anywhere else because you’ll hit the ground running. To a lesser extent, the same thinking applies if you’ve worked with one of the client’s close competitors or if you’ve recently done the exact same work elsewhere.
Factor in the client's size and industry
It’s a matter of what they’re used to and their operating margins.
Small vs Big — Fortune 500 companies are fairly used to paying high consulting rates because they usually contract with major firms, so quote your rate range a bit higher than usual. Conversely, the smaller the company, the more price sensitive they are. Of course, smaller companies can be wonderful clients, but they usually aren’t accustomed to professional consulting rates. You may need to use a lower range, or frankly the work may not be worth your time.
Grocery vs biotech — Some industries have notoriously low or high operating margins, so the money they have to reinvest back into the business will vary along with their price sensitivity. For example, a grocery chain with a 2% operating margin is likely to be much more cost conscious than a medical device company with margins over 80%.
Not for profit vs publicly traded — This difference reflects both size and industry considerations. Not-for-profits tend to be small with razor-thin budgets while most publicly traded companies are large, often with correlating project funds. If you plan to work for different types of companies, consider coming up with two rate scales ("market pricing") — one for large companies and one for small. Figuring this out in advance will give you more certainty when you quote your range to one type of client.
Once you set a rate with a client, it’s awfully difficult to raise it. As a business owner, right now make up your mind that it is your policy not to discount your rate. Somehow when a client suggests a discount it’s easier to say no when you use the word policy. “As a matter of policy, I don’t discount my rates,” or “It’s my policy not to discount rates.” Many clients feel they have to ask for one, even if they don’t really expect it. If the client pushes back and says your rate is too high, read the next tip.
Reframe the equation
I often tell clients: “There’s more than one way to skin a cat, so let’s look at the project as a whole.” Frequently the client has a budget in mind, say $5,000 a week or $15,000 a month. They can get a junior consultant at $125 an hour full time or a seasoned expert at $200 an hour for 25 hours a week. A seasoned consultant has more tools, templates, and experience to leverage so it takes her a lot less time to get the same thing done. A seasoned practitioner will be more effective and efficient and will therefore be a better “buy.” They also need a lot less direction, thereby freeing up some of the client’s time. (This last point often resonates with clients.)
Of course, this time/rate trade-off depends on the client's need — do they need a "pair of hands" to do tactical work or the implementation of a pre-existing plan? Or do they need someone to assess, submit recommendations, and/or create the strategy? If they need both, you can quote a “blended rate” with a midpoint of what you would charge for strategic work and what is reasonable for tactical work. Or you can propose that you partner with someone internally where you focus on the “what needs to be done when,” and the client resource helps make it happen by doing the hands-on tasks. This has the added benefit of building their internal capability through on-the-job knowledge transfer.
Be prepared to explain why consulting rates tend to be high
Remember that your rate may seem high to clients because they don't realize you are running a business. Your rate has to cover operating expenses (internet, phone, bookkeeping), business insurance, and self-employment tax (the employer's half of Social Security and Medicare). Your rate also has to cover your non-billable time such as time spent doing contracts, invoicing, marketing, and business development, not to mention your vacation time.
Remember, there are lots of ways to price your work, including a day rate, a fixed price for the whole project, a retainer, and blended rates (for example, a lower rate for working from home than the onsite rate). No matter how you price your services and expertise, going in with confidence is key.