|Assigning a price for consulting services|
|Formula methodology helps determine value|
|Published Thursday, September 29, 2011 7:03 am|
“Your consulting fees are too high!”
No matter what you charge, you will encounter the occasional persnickety client who balks at your rate. The sticker-shock may be justified. But, it could also be a strategy to persuade you to lower your rate. As a consultant, one of your most important responsibilities will be to accurately establish rates and fee structures.
There are several alternatives for establishing your consulting fees. A few of the most popular strategies are hourly, project-based, market value, per day, or formula-based rates. Arbitrarily multiplying an hourly rate can be tricky. If you set the rate too low, you undercharge and work yourself to death. And if you set your rate too high, you will have a hard time finding clients willing to pay.
Using a project based pricing strategy requires an accurate assessment of the amount of time it takes to complete a project along with the inclusion of additional hours for unexpected challenges. However, on predictable projects, with predictable tasks, a project based fee structure may be applicable. But, again, even a project based fee structure must be priced based your hourly rate in addition to numerous other variables to withstand the scrutiny of a profitability evaluation. A project based pricing strategy includes a requirement for hourly valuation to ensure that project based pricing creates a profit for the consultant.
The easiest pricing strategy is establishing your fees to align with market rates for comparable services in your geographical area. However, this strategy does not accommodate skills and experiences unique to you. Moreover, without a rationale for establishing your pricing structure, it will be difficult to justify your rates.
Similar to the project based fee structure, pricing your services based on a per day rate also requires you to first, decide on an hourly rate. Keep in mind that a consulting day is seven hours, as opposed to an eight-hour employee day. Again, it is critical that you annualize your daily rate to determine if the rate will adequately sustain you and your family financially. You will also need to be realistic about the actual number of days that you will actually be able to work for hire. For example, you may not be available for hire during vacations, sick days, holidays, or when you need to address the administrative functions of running your business.
Basing your fee structure on a formula methodology will enable you a degree of customization dependent upon your unique situation. For example, consultants with special certifications and/or qualifications can justifiably charge a higher rate. You will need to research the annual salaries/fees, expenses, and training needs of professionals with similar experience and expertise levels.
According to the industry standard, the cost of employing an individual needs to be increased by 25 percent to account for benefits. However, health insurance fees are typically higher for a small business owner than for an employee of a large organization. Therefore, start with 135 percent of your annual salary forecast and add an estimate of your annual operating expenses to that amount. Lastly, add your tax liability and continuing education expenses. The result will be your cost of doing business. Now, divide that amount by the hours that you realistically expect to work each year. This is your hourly rate.
Leveraging a formula based fee structure provides the flexibility of pricing by the hour, day, or project. More importantly, a formula based structure will enable you to justify your fees based on an objective assessment of the cost and value of offering your services.
Even the most qualified and seasoned consultants find themselves being asked to justify their rates. If you cannot reasonably justify your rate in a way that makes sense to your target market, you have not priced your services accurately. If your rates are a deterrent to securing clients, you will need to reevaluate your rates. If you have more work than you can reasonably do, your rates may be too low.
There are three effective strategies to assist you in justifying your rates to clients; investment, value, and differentiation. Translate your rate into the return on investment (ROI) for the client. Ensure that the value that clients receive as a benefit of hiring you is greater than the cost of hiring you. In addition to competitive advantage, differentiation provides grounds for justifying your rates.
Refrain from consulting for family or friends to avoid requests to lower your rates and ultimately, your probability of operating a successful business. Family and friends often harbor unrealistically high expectations and an unwillingness to pay fees commensurate what their level of demand. Now, get to work!
WESLEY CARTER DM, who authors a column on leadership and management strategies to solve common business problems, is a partner at KRS Consulting LLC in Charlotte. If you have a question, email firstname.lastname@example.org. Call (704) 992-1211 or email to book an engagement.
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