How to Determine Consulting Fees
When you start a consulting business, you need to be strategic about your fee structure. High consulting fees may rub potential clients the wrong way. Low rates may have them questioning your expertise.
Below we’ll review what influences consultancy fees, how to determine yours, and how to take payments once you’ve started working with clients.
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What are consultancy fees?
Your consulting fees should be based on the value of your work. A number of factors influence that, including the scope of your work, your experience, and the competitive landscape.
The type of consulting work you specialize in will affect your consulting fees, and there are two general buckets you can fall into:
- Strategy consultants focus on high-level business objectives and growth strategies, and channel their efforts on beating the competition.
- Management consultants hone in on improving specific business strategies and specialize in disciplines or industries such as HR, IT, or health care.
How much experience you have in your industry influences how much you can charge. You want to do research to make sure that you aren’t overvaluing or undervaluing your level of experience. Different industries have different rates for projects, so your area of expertise and the scope of the project will influence your pricing model and consultant arrangement.
The competitive landscape and your physical location are the final components that will influence your consulting fees. While you don’t need to mirror your competition’s prices, it’s important to weigh in how much others are charging to remain competitive. Your general location will also play a part in your pricing — consultants living in coastal or urban cities can often charge higher consulting fees.
What kind of fee structure should I use?
Consultants usually choose a pricing model or fee structure for their work in order to remain transparent. There are a few different structures that most consultants use:
- An hourly rate: In this time-based arrangement, you bill by the number of hours worked.
- A project-based rate: Before the project begins, you and your client agree on a fixed rate based on the project.
- A combination fee: You and your client set a fixed rate based on the project as well as time spent on the project.
- A performance-based rate: You charge the client based on the performance or results of your work.
While you may want to use the same fee structure across all clients, you don’t have too. The goals of a fee structure are to make sure that you are compensated fairly for your work and that your clients feel comfortable paying you for that work, so it’s okay to adjust structures based on client or by project. Just make sure that you are clear about your fees before beginning any work.
How do I determine my consultancy fees?
There are a lot of things to keep in mind when you create your consulting rate. It can be tricky to balance all of the factors we’ve outlined above, but there are a few steps you can follow to ensure an optimal pricing structure for you and your client.
Determine your hourly rate based on your experience and industry standards.
If you’re just starting a consulting business, the best way to determine your rate is to divide your former salary by 52 work weeks and then divide that number by 40 (the number of work hours in a week). This will give you the hourly rate you were making before. Then do your research and look at competitor prices to see how you stack up. You usually don’t want to surpass a 25-30 percent markup (according to the SBA).
Estimate the time that will be spent on the project.
Do some real thinking on how much time you will spend on a project. Make sure to estimate your hours for every stage of the project, including client analysis, research, and interviews, as well as drafting, editing, and creating any type of proposal or report.
Factor in additional consulting costs.
On top of what you will charge for your time, you’ll want to factor in additional costs that may arise while you are working for your client. If you are spending any money on materials or transport for the project, you’ll want to include those in your fees. Think through logistical costs, the cost of business disruptions, and other hidden costs that might pop up along the way.
Decide on a pricing model.
After you’ve estimated the time you’ll spend and any additional costs, you need to decide how to translate that into a pricing model. Will you charge by the hour, per project, by performance, or will it be a combination? Make sure you make this decision based on the project you’ve been asked to work on, how your client works, and the structure that you think will get you fairly compensated.
Another way to consider charging your client is to propose a retainer. A retainer is a fee paid in advance in order to secure or keep services whenever they’re required.
Retainers are often used with attorneys because their services are needed on an ongoing basis. Depending on what kind of projects a management consultant is asked to work on, a retainer may be appropriate.
Once you’ve put together consulting fees for one client, you should be able to easily adapt the fee and fee structure for new clients.
How do I take my client payments?
Once you’ve figured out what to charge for your consulting services, you should think about how you’ll take payments.
A contract allows consultants to adopt a professional face, set expectation with their clients, and get paid. In a contract, you can lay out the scope of your work and describe payment details so all parties are satisfied throughout the course of a particular job. While you can write a contract on your own, Square has created a suite of contract templates that you can utilize for free. Once you’ve prepared a customized template, you can attach it to an invoice and send it off to your client for review.
Invoices are a popular payment option many consulting businesses use to charge their clients, and it can help you get paid faster for your services. With online invoicing software, you can send invoices via email and clients can pay via card online. Then you can track all of your invoices and payments through that software.
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