Calculating and Setting Consulting Fees

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You can win new clients, deliver high value, and have an impressive brand and still not create a thriving, successful consulting business. You must price your offerings, so you are profitable if you want to stay in business and grow. At the same time, you must be competitive. Your fees must be appropriate for the value you deliver and still beat your competition. Setting your consulting fees is a tough job.

Setting Consulting Rates is Not Magic
There Are Proven Ways to Set
Win-Win Consulting Rates

Many consultants start consulting by charging an hourly rate. The danger in hourly rates is that you become categorized as a freelancer and not a consultant. Unless you are very careful, hourly work puts you into a commodity business that drives everyone toward ever-lower rates. Avoid hourly rates if you want to build higher income and independence as a consultant.

You don’t have to guess at consulting rates. Instead, use a well-designed consulting fee calculator for calculating a realistic fee range. A good calculator accounts for your value contribution, your business overhead, and profit margins and balances that against competitive rates.

Consulting rates can be hard to set when you are a new consultant. Rates seem to be either plucked from the air or calculated based on hourly work.

Setting your consulting rate is not easy when you start.
Too high and you lose the job.
Too low and you devalue yourself and go broke

There are six ways of setting your consulting fees. The ranges of fees that come from these six ways depend on your branding, your experience, the value you provide to the prospect, and your competition.

When you combine the skill of setting profitable but competitive consulting fees with the client getting methods from earlier stages you will be well on your way to a highly profitable and thriving consulting business.

Warning - the New Consultant's Dilemma

As a new consultant you have skills, but you may lack the brand, client testimonials, and experience to compete with more established consultants. This situation often forces new consultants to work as freelancers paid by the hour or by the short task.

Working as a freelancer can get you into companies and earn short-term revenue, but too often the client views you as an hourly contractor and freelancer. Once you are seen with that image it can be difficult to be seen as a high-value, high-fee consultant.

If you do work with a client using time-based fees, build rapport with the stakeholders and learn their positions. Learn the client's pains and opportunities for adding value. Continually look for situations where you can step out of hourly and skills-based jobs and step into decision making and consulting roles. When you begin getting more of these opportunities you’ve earned a new Statement of Work and proposal.

Setting Consulting Fees

There are many different methods of setting consulting fees. Here are descriptions of the most frequently used methods.

Pro-Bono Consulting

As a consultant with little or no experience in an area, one way to get work, learn skills, and get testimonials is working pro-bono. These combine to mean more work and higher pay in the future.

You might think that pro-bono work won’t help you, but it can. A lot!

“Pro bono” is a Latin phrase meaning, “for the public good.” This isn’t the same as volunteer work. Pro bono work is professional work done as a service for the public good.

One of the easiest ways to do pro bono is to partner with experienced consultants who need assistance. Spread the word amongst your colleagues that you are available for pro bono work in the areas where you want to gain expertise.

There are many different methods of setting consulting fees. Here are descriptions of the most frequently used methods.

Sub-Contracting Rates

Another way to start consulting with little or no experience and get paid is by sub-contracting to another consultant. Sub-contracting enables you to work for another consultant, help with lower-skill work, gain experience, and get paid.

Not all sub-contracting jobs require expertise. For example, if you want to be a facilitator or trainer you can assist the primary consultant by taking the role of course registrar, responding to student’s questions, and assisting in-room preparation. While the primary trainer runs the course or facilitation you can be in the back of the room visualizing how you will do it when you are on your own.

There are many ways to assist even if you are not yet an expert. You can do research, backroom preparation, mentoring, interviewing, writing code, or preparing reports.

Hourly and Daily Consulting Rates

Most consultants start using an hourly rate. It’s easy to calculate and you can find competitive hourly rates on freelancer websites. Using an hourly rate makes calculating a daily or monthly fee easy. Although many consultants start here because it’s easy, you don’t want to use hourly or daily rates as a permanent pricing structure.

There are many problems with charging at an hourly or daily rate.

Employers will view you not as a consultant being hired for the value you add to their business but rather as a freelancer doing skilled work by the hour. From that viewpoint, it becomes easy for them to see you as a commodity that can be replaced with a few minutes' search on the internet.

If you use hourly rates or use them as a base for other calculations, make sure you include all the hidden “wages” you would receive if you were a full-time employee. Make sure you adjust the salary for your overhead costs, marketing time and costs, self-employment tax, healthcare, retirement, missed time for professional education, and vacation. These are all “costs” that usually don’t show in online salaries for full-time employees.

A rule of thumb is to use 30% of the salary as overhead. I recommend adding a minimum of 40% as overhead because you should spend 30% of your time doing marketing. In addition, the US Federal Self-Employment tax is 15.3% in addition to federal and state income tax.

An ethical problem with hourly and daily rates is the conflict between your and client’s interests. You want to earn more which means working longer hours. Your client wants the job done as quickly as possible. This conflict can lead to doubts about trust and competence.

Always track the tasks and time in your consulting work.

Data from past work must be used to calculate project-based consulting fees.

An even bigger problem with hourly-based rates is that there is no way to leverage or scale your work. You are stuck at the hourly/daily rate. The only way you can scale your business is to hire lower-skilled consultants and bill them at higher rates, and to look for ways to expand the scope of work continually.

One acquaintance, long experienced in consulting with a big defense industry consulting firm, told me that the firm’s standard mode of operation was to win government contracts by bidding low, staff with lesser experienced consultants at high rates, and then expand the scope as quickly as possible.

As an ethical consultant, there are better ways to keep your business small, in control, and scale to a high income. Scaling growth through packaging and productizing your consulting services is covered in a later stage.

Project-Based Consulting Fees

You should move as quickly as possible from hourly/daily fees to project-based consulting fees. Most consultants charge using project-based fees.

Project-based fees have the advantage that, if you are experienced and know your hourly rates and costs you can make an accurate estimate of costs and then add your profit margin. Don’t forget to add a profit margin for your business and use accurate project estimates, hourly fees, and overhead costs.

The website, Metric.AI, gives professional service firms a range of profit margins.

“The typical profit margin for a professional services organization is in the range from 15% to 25%,
while a particular project margin could be from 25% to 50%, and
the profit margin for a particular consultant could be from 50% to 400%.”
_{“Why Profit Margin is an Important Metric”, 2021, Measured Analytics, Inc}

Two metrics you must track to improve your consulting business are Gross Profit Margin and Capacity Utilization Rate. Your Capacity Utilization Rate is the percentage of time you do billable work. If you have a high utilization rate, you will be more profitable and competitive.

A good rule of thumb is that riskier, more specialized work done less frequently has the highest profit margin. Of course, having a highly recognized personal brand also translates into higher fees.

If a project is new to you, look for a mentor. Mis-estimating can be painful to your brand, to work/life balance, as well as financially.

Consulting Retainer Fees

Most consultants use retainer fees as their first step toward stabilizing and increasing their income. Retainers are funds paid to you by the client on a recurring basis, whether you do work for them or not. You are being paid for your expertise and ability, not for being on-site.

Most consulting retainers are of two types. One type of retainer ensures you reserve a specified number of hours per month for work with the client. If those hours aren’t used by the end of the month they do not “rollover” to the next month. This type of retainer is usually used for onsite work doing a specialized skill.

The second type of retainer is the type you want. This retainer makes you available for your expertise and experience to help the client make decisions. You could deliver high-value in a fifteen-minute phone call that helps the client make a crucial decision.

Retainers are great for stable, recurring income. The downside of retainers is that at some point they will end.

Value-Based or ROI-Based Fees

Value-based or ROI-based fees are fees based on how much value you will add to the client’s business. ROI stands for Return on Investment.

Few consultants use Value-Based or ROI-based fees. The fees are difficult to calculate and easy to refute. You need high trust and high brand recognition in a unique area to use these fees.

There are a few consultants with high name recognition and close personal ties to C-level executives who propose value-based fees. For those consultants not in the rarified atmosphere of C-level Global 1000 executives, the multiple streams of income approach is more attainable and more probable.

For Value-Based or ROI-Based fees you must determine ahead of time what the measurement will be for determining increased value. From my experience, it is very difficult to get businesses to pay based on an estimated future value. The reason is that future value usually depends upon multiple factors. A tough-minded owner will ask you how you can prove that the increase in sales was due to your consulting when the sales increase could have been from new salespeople, a change in the economy, or decreased competition.

Before committing to a Value-Based or ROI-Based fee, check with other consultants or staffing agencies to see whether the client is reliable and ethical. A few companies make it a practice to refuse or delay payments to small consultants and businesses. The Wall Street Journal, The Week, NPR, Inc. magazine and USA Today have documented how Trump’s businesses have continuously used this tactic to avoid paying hundreds of small contractors.

I know two solo consultants who were not paid by very large companies after they delivered the agreed value improvement. In one case, the cable company was entering bankruptcy and told the consultant to “get in line.” In the second case, the company told the consultant to set a court date. The consultants settled for significantly lower fees.

Selling Your Services Based on Value

While I find Value-Based or ROI-Based fee setting risky, ROI is excellent for justifying a higher fee for a unique or a new service. You can use ROI-based selling to gain client buy-in for higher fees. Use an ROI calculator and the client’s change estimates to justify your increased fee.

I’ve used this method to help an international internet software company sell million-dollar software licenses. I built a robust Excel-based ROI calculator that calculated the increased sales and decreased costs a buyer would receive using the software company’s product.

The prospective purchasing managers would sit with the software salesperson and enter estimates of employee time savings, increased marketing reach, industry-standard high and low conversion rates, and more. The output from the calculator showed the three and five-year Net Present Value attributable to improvements in IT and marketing performance. It also showed the ROI of the investments using the CFO’s own risk rates. Printing out the inputs, estimates, and background calculations made it much easier for the executives to justify the purchase.

Return to top: Ultimate Guide to Starting a Consulting Business