Setting rates: How high should you go?

December 8, 2000 —

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.

Fixed versus hourly rates

On the question of fixed versus hourly rates, you should let the client take the lead
and be prepared to accommodate either. If the project is vague and the client wants a
fixed fee, draft an interim agreement that covers an initial portion of work that is
better defined -- and then include a quote for the remainder of the job when you
deliver your initial results. With hourly rates, you can make clients feel more
comfortable by providing time estimates, agreeing to not exceed a certain number of
hours, and promising to provide status reports of progress against estimates. While
hourly is safer for you, ultimately you can make more money with fixed fees because you
can charge for the market value of your work product. The key is to have a good sense
of how long projects will take, This usually comes from experience and keeping close
track of your time across multiple projects, a topic of a future column.

As you become established, you will have to keep tuning your rates. I generally
don't raise my rates with existing clients, but do so over time with newer clients. The
best time to test the waters is when you already have plenty of work and can afford to
take the risk of not getting a job. Just don't charge excessively with a desperate
client. You might get the job, but you won't necessarily get repeat business. So be
reasonable and deliver good work, and you will be amply rewarded.

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