Many decisions are made independently by consultants, including when to work, who to hire, and how much to charge. By converting assessments of your value into a comparable formula, adhering to industry standards can make it simpler to choose your consultant hourly rate or other charge ways.
Description of a consultant
A specialist in a particular subject who works on a freelance or contract basis for businesses or people rather than as a full-time employee is known as a consultant. Businesses may find this to be an appealing choice because they can take advantage of the expert’s skills and labor without incurring the expenses of hiring a full-time employee, such as paying benefits. In comparison to working for one company, consulting might offer the consultant more freedom, a wider variety of jobs, and higher remuneration.
A consultant uses their knowledge to assist a customer in carrying out or finishing a certain project or series of tasks, such as opening a restaurant, enhancing marketing initiatives, increasing profits, or increasing sales. A consultant bills a business in accordance with their hourly rates or other established consultation fees.
How to figure out your hourly consultant fee
As a consultant, you can set your rates based on your worth as a subject-matter authority and your financial needs. Your hourly rate might be much greater than it would be if you were a paid full-time employee because you might incur additional costs that the firm doesn’t directly reimburse you for, such as healthcare, bookkeeping, and tax preparation.
You can determine your consultant’s hourly rate in two different ways:
Multiply an hourly rate by three
Considering if your consulting job is comparable to the work being done by a full-time employee at the same organization is one way to determine your hourly pay. If you recently held a full-time salaried position, you can use your prior annual salary to calculate your hourly wage. If you’re in a new location or have acquired new talents since working a full-time job, use an internet job board to find the typical compensation for someone with your skills.
If you were a full-time employee, multiplying your annual income by 50 for the number of workweeks in a year will give you your hourly rate. This will give you your weekly wage. Next, divide that sum by the weekly average of 40 hours of work. Once you are aware of your hourly fee, multiply it by three to account for the additional expenses incurred by becoming a consultant.
Example: In order to determine a potential consultant’s hourly rate using a $75,000 yearly full-time employee salary:
$37.50 per hour (75,001 / 50) / 40
For your hourly consultation charge, multiply 37.5 by $112.50.
Make a wage target
If you have a defined annual compensation objective, setting a salary goal is another way to figure out your consultant hourly rate. To earn $75,000 a year, for instance, you must first determine how many hours you wish to work each week before figuring out how many hours you must work overall. Next, double your target annual wage by the amount of hours you anticipate working each year.
Remember that you’ll estimate your paid hours for the week as a consultant, which constitute only a portion of your working hours when additional tasks are taken into consideration.
Example: If your targeted yearly pay is $75,000 and you work 20 paid hours per week over 50 weeks in a year, here is how to figure out your hourly rate:
20 x 50 equals 1,000 hours of effort each year.
In order to calculate your hourly consultation charge, divide 75,000 by 1,000.
Other pricing schemes for consultants
If you’re a consultant who is just getting started or searching for a more reliable source of income, charging a suitable hourly rate might not be the best option for you. Other pricing strategies to take into account when determining what to charge as a consultant are as follows:
As a new consultant, charging less can help you draw clients and expand your clientele. You might decide to include non-cash elements in your payment agreement, such as a favorable online review. Consider the payment range for consultants in your field when determining how much to charge, and put your pricing around the low end.
Example: You recently left a corporate position to become a consultant, but you don’t yet have a portfolio. Despite having determined a $100 hourly wage, you haven’t been able to secure employment as a new consultant. For your first work, you decide to charge $50 per hour. After that, you add the work to your portfolio and request a website evaluation from the client. You can now get employment at a rate of $70 per hour and advance to $100 in a year.
If you perform a lot of comparable work, such as designing specific items or developing similar plans for many businesses, charging by the project may be the best pricing strategy. If you continue to bill by the hour despite becoming faster at your job, you will consistently make less money. A suitable methodology for determining a project charge is as follows:
Hourly rate x (estimated hours of work x 20% for contingencies) = Project charge
Example: It takes you ten hours to create a marketing strategy for the launch of a new app. In case you encounter problems, you add 20% to the time, or two more hours, giving you a total of 12 hours. You multiply 12 by your hourly rate of $40. You demand $480 for the creation of an app’s marketing strategy.
Initial payment plus retainer
A solid pricing strategy for reliable income can be an upfront charge followed by a monthly retainer. For consultants just starting out, the low initial charge can be advantageous because it makes it easier for businesses to invest in your services up front. The equation would be as follows:
Initial fee + (Monthly retainer x Months worked) = Total consultant income
Example: A new client setup takes two hours, and since your hourly rate is $40, you decide to charge an upfront cost of $80. Your monthly retainer was set at $450. You are employed for six months by a new app firm to create marketing strategies for its releases. You earn $2,780 over that time period. During that period, the company released five apps, so being on retainer allows you to earn more than charging by the project, and it also allows the company to pay you less than they would have to have a full-time marketer.
Return on investment (ROI) is another name for value-based pricing, which is when a consultant bases their fee on the results of their work. To be successful with this approach, first have a conversation with your client and find out what they want from your work. Estimate the financial and non-financial benefits they anticipate, such as a rise in revenue and a reduction in the workload for full-time staff. Next, determine the annual recurring value of whatever more value your work may continue to generate for the firm. The equation reads as follows:
Increase in revenue + Value of other benefits + Annually recurring value = ROI value
Determine certain percentages as probable payment rates after calculating ROI value. You might propose doing more work for a bigger proportion of the ROI value as you bargain with your client.
Example: Your marketing strategy will initially bring in $15,000 for the app company, but it will also free up hours that others have been using to complete the same tasks, saving the business $5,000 in total. Additionally, your marketing strategy will generate $15,000 the following year, just before the business stops developing its software. The sum of these results in a ROI value of $35,000. You will earn $1,750 if you charge 5%; $5,250 if you charge 15%.
Tips for setting your consulting rate
Even while you can calculate the cost of your consulting services using a formula, you should also take other factors into account when determining your rate. Here are some things to remember:
Understand the market
Understanding other consultants’ pricing and the services they provide is essential if you want to compete with them. When deciding how much to charge, you may assess how your skills and worth compare, and you’ll have a better idea of what clients should anticipate to pay in terms of fairness for your services. By staying in touch with other consultants, you can also gain access to professional contacts who might recommend you for a project or, if they’re too busy, allow you access to some of their clients.
Have confidence in your skills
Due to their desire to maximize their investment in you, the businesses you interact with can try to negotiate a better price. Take a time to consider your priorities and keep in mind how you got at your price before this dialogue starts. If they’re looking for cheap consultation, they might need lower-quality services. If you’re certain that your services are worth what you’re charging, reiterate that sentiment.
Consider your goals
In addition to value and market pricing, consider your goals. You may be able to decide how much money you want to make from consulting in the long run by creating a plan to get there. Whether you want to contribute to a certain organization with the potential of working there full-time, or whether you want to work as a consultant for a prolonged period of time, is something to think about. Since you will be aware of how these goals and your individual thoughts effect how highly you value your labor and your income, being honest with yourself will help you think about your price with objectivity.