If you are a new consultant, one of the most important decisions you need to make is what to charge for your services. Even if you've been doing this awhile, it's important to revist your price to make sure it's right.
Getting the price right is critical to building a thriving consulting business that provides value to your clients and supports the life you want.
But where do you start? How do you approach such an important decision? What do you need to know to get it right?
It Starts With You
The most important thing when you're establishing or revisiting your price is to start with you.
There's a lot of information on the web about calculating what you should charge based on your previous salary and other inputs. That’s not how I would ever tell anyone to do it! Start with you and your life, and then adjust the rate based on other inputs.
I encourage this mainly because work is a part of your life, but it's not your whole life. Your desired income or number of hours you are able or willing to work may change based on your life circumstances and aspirations. Either of those variables will change your price. Know those first. Then, add in the other inputs to get to a price that matches your life goals with market realities. This way, you develop a price that supports the life you want or is realistic.
The most common trap that consultants fall into a trap is underpricing themselves. Some reasons for this are:
They think the only way they’ll get business is to be the cheapest.
They just started as a consultant and are worried that they don’t have any income yet.
They have fallen into the "feast or famine cycle" of consulting and think having a lower price will get them get out of it.
They lack confidence in the value of what they offer.
They haven’t done their homework about what others are charging in the market.
They build their price based on how job positions have previously been valued and not what value they offer a client.
But there are so many downfalls to underpricing! Having a price that's lower than your competitors may seem like a smart business strategy, but it isn't.
Aside from being paid less than what your value is, if you underprice your services, you will have to work more to have the income you want. If your price is too low, you will have essentially established a price in your market that is going to create an unsustainable situation for yourself. Working more to make up for a price that is too low doesn't work in the long term because it doesn't allow you to maintain the high performance you to deliver excellence to your clients. And excellence is how you will build a reputation that will attract clients.
Yes, some new consultants also overprice themselves. I see it happen less often than underpricing, but it can still be a problem for some folks. Sometimes, it is because they inflate the value that they offer clients. Other times, it’s because they did not do their market research to know that their price was too high.
This is where having a mix of honest self-reflection, getting feedback from knowledgeable and honest people, and doing your market research will be the difference between overpricing yourself and pricing yourself right.
Of course, these types of problems tend to self-correct one way or another. Generally, overpriced consultants don’t get business because of their price—in which case, the market has spoken—or, if they got someone to pay their price, they don’t get repeat business because of the value they provided did not equal or exceed the price.
You need to avoid these traps to get to the right price and build a sustainable business and life. So let’s dig into 4 important principles about pricing that are critical for you to know as you build your price:
1. Price communicates value. Yes, many clients are price sensitive and want a deal, but most people believe, on some level, that you get what you pay for. Few clients want the cheapest consultant because they think that means they would be settling for the bargain bin/least valuable consultant. And they are often right! For those that do choose the cheapest consultant, they often don't come back a second time.
2. Don’t trust your lack of confidence. If you are someone who tends to lack confidence or are so nervous about becoming a consultant that your confidence is taking an unusual dive, then there is no reason you should believe yourself about your value. At least not now. Get input from people who know you and what you do, know the value of what you do, and will be completely honest with you. (Hint: Don’t ask people who lack confidence or who worry about income because you’ll likely get an answer filtered through their confidence issues!)
3. Know thy market. This one requires exploration. Any unverified assumptions can send your price in the wrong direction. Don’t assume you already know the market, even if you have hired consultants before. There can be a big range in what other consultants charge and what they offer for the price. The more you know, the better you’ll be able to set your price.
4. Your past is not your value today. When you were employed, there are many reasons that your salary and other compensation were what they were. Many of those reasons have nothing to do with your value. Don’t equate your past salary with your value today. In consulting, value is defined by what you can do for a client that is valuable to them, not the cost for you to work in a specific position for an organization.
Key Inputs for Your Price
Now that you know which traps to avoid, you need to know what inputs you should consider to create your price.
Remember when I said to start with you and your life? I really meant it. So this input involved asking yourself three key questions:
How many annual hours do you want to spend working versus in other areas of your life?
What is the lowest annual income you want to make?
What is the maximum target income that you would like to achieve as a consultant?
Hours. This question is really about making choices about the proportions you want or need for different aspects of your life. There is no single answer. There is only the answer that works for you in your particular life circumstance. When you calculate how many hours you want to work, I would not do that in isolation. I suggest calculating how you will spend all of your time. Include all your work hours—whether they are billable or not. That includes time to do business development, tracking hours, invoicing, conferences, revenue projections, etc. It also should include assumptions about hours or days you do not plan to work. This will be an iterative process so don’t worry about the implications of the hours you picked yet.
Income. Determine the lowest annual income you want to make. I am not saying that is what you should make. This is just a threshold—a not-to-dip-below amount. This amount should pay for your living expenses, savings, and lifestyle, plus some percentage cushion on top for unexpected expenses and/or an enhanced lifestyle. Remember, this is the minimum income threshold, not the upper threshold. Include assumptions about changes to your taxes, benefits, and other expenses that you will now incur directly here too. (Remember: if you are first starting out in consulting, have at least a six-month reserve because often it can take a while to build up your business. And it can take a while, depending on how you charge, to get paid.)
Then determine what you'd ultimately like to make. Don't worry about it being unreasonable. You're going to look at it against other inputs, like your market. But you at least want to have a target in mind to aim for. And even this may end up being too low! But it will work for now.
Your "Play Price"
Next you want figure out a “play price,” that is, a price that you are going to play with it until you get to a final price. Don’t get attached to it! It’s just a place to start. Depending on how you expect to charge for your services, this could be expressed as an hourly rate (which is not the only way to charge!), a retainer, or a sample flat fee or value-based fee for a package of work. (For the latter, you would need to take an extra step of defining what you htink a typcial package of services would be.)
Other Price Inputs
Once you have a play price, consider it against these other price inputs and adjust it according:
Your market. This is where the market research you did comes in. Look at the hourly price range for consultants who do things similar to what you will offer. Where does your price fall in that range? Is it in the range? If not, get it in there. If it’s at the bottom, I would move it up. Does it fall in the range where you think it should? This last question is a judgement call based on what you have learned about your market and your honest assessment of your value. Other price inputs may change where your price lands so keep coming back to look at the position of your price in your market range.
Your overhead and expenses. You may want to adjust your minimum income threshold based on assumptions about nonbillable expenses related to work. Will you work out of an office or need to lease or buy equipment? Do you need software or a team to support you? Bake those into your minimum income threshold (or if you want to get really precise with how to do this, ask an accountant).
Bad debt. Unfortunately, you should also include some assumptions about the percentage of earned income that you won’t pocket because some clients don’t pay you what they owe you. I have only had this happen once. A client only paid a portion of what they owed. I know other consultants who have had this happen more often so it’s worth including in your calculation. I generally would include an assumption of 5% of unpaid income, depending on what you know about your market. If you aren’t sure, take another consultant out for drinks and ask them about it. Don’t ask them to name names, but get them to spill the beans so you can get a sense of how often it happens in your market.
The truth with bad debt is that this is often because consultants do not renegotiate the price when the scope changes. That means they are doing unpaid labor. That's why renegotiating is so critical. But I would include this in bad debt, even though it's self-inflicted bad debt!
Profit. You are a for-profit consultant, so always include a percentage of profit you want to make. You have to check back on the market range to make sure you don’t fall into an overpricing trap, but always include some assumptions about profit. If you don’t, you’ll likely be stuck in an underpricing trap.
Price increases. If you are doing a multi-year calculation, include some assumptions about increases in your price. You may do this annually to adjust for cost of living increases or cost of doing business increases. Note that this is not the same as the federal cost of living increases. This is set by you based on your circumstances and market changes or if the cost of doing business increases. Often it can be between 2% and 5%, but that’s not a hard and fast rule. It’s good to decide a maximum ahead of time and include language about it in your contracts so your client can anticipate it.
You may increase your price for certain engagements that require more of you. For example, if a client wants you to be onsite and away from your home for extended periods of time, you may charge more for assuming that extra burden and any extra expenses associated with that arrangement, such as child care or pet care.
You also may increase your prices when you can offer more value based on new knowledge, expertise, or skills. If you have a plan for how you are going to increase your value (a great idea!), consider how that might increase your price in the future.
Using these inputs, play around with the price until you get it to a place where you feel comfortable. Keep in mind that adjusting your price based on these and other considerations are as much art as it is science!
Given that, I always suggest having other knowledgeable and honest people give you feedback on your assumptions and price before you finalize it. And then pay attention to what happens in your market when you offer a client a price. My one warning is not to immediately lower it if you don't get engagement. There could be other reasons for that, such as not having a clear and compelling offer! But keep getting feedback, looking at the price against these principles, and inputs and make adjustments as needed.
Need More Help to Get Your Price Right?
If you’d like to dive deeper into how to price your consulting services and get clients to say yes to your price, I invite you to join me in my FREE 90-minute training on September 1st, 2020.