As a freelance marketing consultant, I constantly wrestle with the question of how much I should charge for my services. I’m used to charging by the hour, but I have a sense that limits me and would like to move to a project-based fee, but how do I calculate the fee and, for that matter, I’d like to increase my prices so I earn more too. How do I do that and how do I justify my rates to new clients? Any advice would be greatly appreciated.
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!
Thanks for your note, Christopher. I like the idea of a retainer, but usually that’s for an attorney or other legal counsel, rather than a more technical project. Then again, if you ask for 25% up front, say, then it’s the same sort of thing as a retainer. My two cents: If you can get it to work, go for it!
Thanks Dave, AMAZING ARTICLE
I am refreshed to see such valuable information on this topic.
You gave some great lines about showing value using the chef and surgeon reference which were both humorous as well as very powerful for landing new clients.
Breath of fresh air… Thanks Dave
My thoughts were to ask for a retainer for the full project and then bill by the hour until the retainer runs out, hopefully completing the job on time and within budget. Any additional time can then be added as an additional retainer.
Can you please share your thoughts on this Dave?
hi dave,
this is an exceptional piece of writeup and i cant thank you enough for all these notes. very inspiring, apt and to the point.
I need couple of inputs, as a guidance from your side. I know my questions are general but your generic inputs on that:
1. What is the best way to approach clients. Starting on your own, would mean, you may not even know when the companies float their RFPs, or what do they need? making cold calls, on a fact that we help you optimize your business sounds too generic as well. So, how do you position yourself, or build yourself, so that in the beginning one could look at getting some leads?
any inputs would be of great help. thanks in advance!
Dave, I have an offer from the dean of a local university to put my skills as a seamstress to the test. Problem I don’t have a clue what to charge. I consider myself a seamstress because I’ve been sewing for myself and almost all of my family since 1990. I’ve never been paid for any of it. PLEASE help me. I live in a very small central town in Virginia. How much should I charge, and how…Hour, job? There is only one other in this town and she does wedding dresses. Sincerely, lindag
Hello
I would like to really know as to how
i decide what price to charge for delivery
or pickup of any cargo. As im in the process
of starting up a courier service.
Sean
This is incredibly helpful information, and it’s funny because after reading I had the same question about capping involvement, and someone put that as the first comment.
I’m finishing a proposal tonight and this information is really timely for me. I need to go back and put more emphasis on value.
Thanks,
Tia
Bhargav:
In my experience, it is not wise to work as a marketing consultant based on commission. It is your job to provide a marketing communications plan, not to be a sales man. When you combine the two you are creating a conflict of interest – you may create a mar comm plan that will benefit you immediately (an increase in sales resulting in higher commission) rather than benefiting the company for the long haul (i.e. effectively branding the company which may be a 5-year plan).
Dave,
I am also going to start my own business consultancy. Suppose, I am able to increase my client’s business by xx%. I want to charge commission for that profit. Now, if some people have more cash-in type business (they don’t enter each and every entry in their account to save taxes) and hide increase in their business and shows me little profit difference than how can i determine it.Please reply
Dave, you’re right, in some industries it is tricky, but then again, don’t you think that with a marketing company that the same problem exists? You bid $10k for a print ad development campaign and every single meeting they have new ideas and want to tweak and adjust and alter and try a different creative?
Nail down the spec before the contract begins, say that your rate is $xx for developing what you’ve detailed, and $yy/hr for overage. Each time something changes, it’s a “change order” and requires either an adjustment to the base rate or additional per-hour charges because you’re now off spec.
Make sense?
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.