Setting rates: How high should you go?

December 8, 2000, 10:07 AM —  ITworld.com — 

Knowing how to set, negotiate and defend rates is crucial for a consultant. Go too
high and you'll lose business. Go too low and you'll leave money on the table -- or,
worse yet, undermine your credibility. It is also important to know when to discuss
rates and how to decide between fixed fees and daily or hourly fees.

First, set a baseline for your time value. One simple approach is to take the hourly
salary you would receive doing comparable work in a full-time position and double it to
cover your overhead and benefits. This will also compensate you for the risk of being
in business and for the convenience to your clients of hiring you for only as long as
they need you. So, if the position is worth a $50,000 annual salary, an hourly
consulting rate of $50 would be reasonable starting point. Market research never hurts
either. In previous columns, I discussed the value of having a network of other
consultants with whom to share leads. Ask some of these close colleagues what they are
charging.

Be clear on what kind of work you wish to do. If you are an expert on esoteric
matters who can provide clients significant value in a brief period of time, you will
want to charge a higher rate than the guideline above. This is because you will spend
more time lining up assignments and less doing billable work.

Minimum commitment

Consider establishing a minimum commitment when taking on new clients. Given the
overhead of agreements and other paperwork, I don't take on new clients for less than
at least a day of work. I charge a premium for the first day, and then provide a
discounted rate for subsequent hours.

Don't bring up your consulting rates immediately; spend some time with your client
first to determine whether there is a good fit. A client who has decided that he or she
wants your services is much more likely to accept your rates. I usually provide a quote
as part of a preliminary proposal that clearly spells out deliverables. If the client
pushes back on the price, I don't lower my rate; instead, I suggest ways in which I can
reduce the scope of the work so that the client ends up paying a lower overall fee.
Sometimes I find that its a good idea to ask clients at an early stage about the budget
they have in mind. With that information, I can structure my proposal accordingly.

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