This is a core question for anyone in the service business, but more than that, it's really a fundamental question for any business. Sometimes your price is set by your competition (think gas prices at the local gas station, where they're always within a few cents of the adjacent gas stations, and it's the lone station that has the freedom to add a few extra cents to its prices) but usually it's the business owner that decides the price, and the market reacts to it (e.g. hires you or not), not vice versa.
It's not, however, ever about price, but value. I suggest to you that consulting -- that any service business -- is all about establishing a solid value proposition and letting the customer decide if they need you and can afford you, not whether you're worth what you charge. A good proposal will cause them to ask how they could possibly afford NOT to hire you.
Let me offer up a hypothetical situation to illustrate. You go into a potential client's office, having already reviewed their materials and noticed that they have a very poorly worded call to action on their Web site, one that you know is adversely affecting their sales. You can fix it in less than a minute and already have two replacement candidates in mind.
You turn to the owner of the company and say "what would it be worth for me to be able to increase your sales by 10%?" She thinks for a minute and says, "an increase of 10% would have us gross $37,000 more this year, and net $9,800."
Now you know that one minute of work will be worth almost $10,000 to this company. How much are you going to charge for it? $10 because, heck, it's only a minute's work, and let them have the very best deal they've ever had with a consultant?
To understand the answer, I'll quote my friend Steven Sashen, who was telling me just the other day that his consulting rates are high because "I can build that in a few hours, but it took me fifteen years to learn how to do it". To restate, clients don't pay for your time, but for your expertise.
This intuitively makes sense because an hour of work from one person doesn't equal an hour of work from another. That's why there's often such a dramatic pay disparity between line workers and corporate executives, for example: an hour of work on the line might produce a widget or gizmo, but an hour of the executive's time could produce an acquisition or multi-million-dollar contract.
As a service provider or consultant, your rates should always go up over time because you're learning to become more efficient and gaining additional knowledge each and every day you work. Even if you seem to do the same task each time, your skillset increases, which makes you more valuable to potential clients.
You should almost never negotiate your fee with clients. Doing that is like saying "I'm worth X, but since you can't afford me, I'll pretend that I have less knowledge and experience and charge 1/2 X". Do you negotiate with your doctor before he begins a surgical operation? Do you only go to really cheap restaurants because you don't want to pay for the expertise of an experienced chef?
That's why you need to move from hourly rates to either daily or project-based pricing. To calculate a project price, try to figure out how much time it'll take you, add 50% because you know the client will keep changing their mind, then ask yourself whether it's within your core competence (justifying your premium pricetag) and whether it will, in a measureable way, either increase corporate revenue or decrease their cost of production or service.
Good project proposals are written around the value proposition, but should also detail the estimated number of hours, milestones, deadlines, and offer up a brief synopsis of your relevant experience for the job. Say "Estimated time to complete: 100 hours. Project fee: $7500", not "Time to complete: 100 hours. Project fee: 100 * $75/hr = $7500", because if you put it in terms of hours, the client will think of you as an hourly worker and want you to keep a timesheet or justify your time spent, rather than deliverables. That's not the path to greater credibility and higher income, needless to say.
Finally, cap your project involvement. Anyone who has been around the service or consulting business knows the client who has daily changes and is never quite satisfied. Your 100 hour estimate that you were sure would be way over ends up being 63 hours too short, and since you bid a project price, you're now working at McDonald's wages. Not good.
That should get you going with your new, more profitable consulting business. Good luck!
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Dave, please explain "Cap your project involvement"
In the field I spend most of my time, software development, there are two rules that are always true.
1) The client never knows what he wants until he sees it.
Therefore, working off a "specification" does no one any good. Even if you build exactly what they said they wanted it isn't what they want now.
2) The project will take as long as the client has money.
So far, the only way I've found to deal with both of those successfully is to bill hourly.
Since you didn't go into a lot of detail about how you might cap involvement, I'm having a hard time understanding how to apply it in a way that addresses these two issues.
Specifically, it would be helpful if you applied this to the Agile method of software development.