Q. I am thinking of launching a one-person management consulting practice. In fact, I have had several companies approach me about helping them. Unfortunately, I have no idea how to price my services. Do you have any ideas that might be helpful?
A. Setting consulting fees is challenging. You don’t want to overcharge your client or set your fees so high that you can’t get work. On the other hand, you want to be fairly compensated for your time. Below are five factors to consider when setting your hourly billing rate.
Size of the opportunity – Bain Consulting, McKinsey & Company, and the Boston Consulting Group are able to charge millions of dollars for an engagement because the projects on which they work hold the realistic possibility of yielding benefit to their clients in the hundreds of millions, if not billions, of dollars. This, of course, means that they can typically only serve the largest companies in the world.
Unless you have an unusually strong pedigree, you won’t be able to work on opportunities of this magnitude or charge these fees. Nevertheless, think about the size of the opportunities on which you will work. Our rough rule of thumb is that the expected upside for the client should be on the order of ten times our fees or more. One of our core values is that our clients receive value in excess of our fees. Using this rule of thumb helps to ensure that this is the case.
Ability of the client to pay – Even if you are working on an opportunity with $10 million of potential upside for the client an unfunded startup won’t be able to pay fees of $1 million. They just won’t have the cash. In such situations there are three options: (1) pass on the work, (2) accept lower than normal fees (probably much lower), and (3) negotiate fees that will be large only if the upside is realized.
From our perspective, the third option is the most attractive. This often means accepting equity, some form of convertible debt, or a share of future profits for your services. Structuring fee arrangements in these situations can require experience and creativity. It may be advisable to seek help. Of course, if the client has been funded by angel investors or venture capitalists, it is more likely to be able to afford your normal fees.
Competition – The free market will set the cap for your fees. If prospective clients can hire equally qualified competitors at half of your rate, you are unlikely to be able to bill many hours. It is worth asking people who are doing what you plan to do how they set their rates. If you are uncomfortable approaching local competitors, ask out-of-town consultants with whom you are unlikely to compete. Google makes it easy to find these people.
Your financial needs/goals – Your wants and needs will not affect a client’s ability or willingness to pay. However, it should affect what you charge. Recognize the fact that you are very unlikely to be able to bill eight hours in a typical workday (unless you are working as a fractional employee). Time spent on administrative tasks, marketing your services and personal issues will make this an impossibility. We find it to be a challenge to bill more than about 100 hours per month. If you are just starting out, this is likely an aggressive target, so you may want to adjust it downward. Nevertheless, you can get a floor for your fees by taking your aspirational fee income and dividing by 1,200 (12 months X 100 hours per month). If you set your fees at the level you need to achieve your income objectives, you will find out whether your business model is viable.
Set your fees too high rather than too low – Once you have established a billing rate with a client, it is difficult to raise fees significantly. On the other hand, it is much easier to lower your billing rate. Therefore, our advice is to err on the high side.
Setting fees always involves an element of judgment. However, considering the five tips above will put you on the road to setting prices that are appropriate.