One of the biggest taboos between consultants is sharing what we charge, so let’s break it open and talk pricing strategy. Later I’ll post a survey to gather data (anonymously) about how consultants price so we can all learn from it.
Pricing yourself is one of the biggest challenges, because do you base it on what you want to earn? How you want to position yourself? What the market will bear? The value of your service? What others charge by comparison? I suggest this is a combination of all the above factors – and each needs to be considered to come up with a pricing strategy that works for you.
I would suggest the first step is figuring out how much you would like to earn, and then adjust based on the other factors. A long time ago I learned a great little formula for calculating that, and here is how it goes.
Let’s assume, for purposes of this example, that you want to make $100,000 per year, that you work in the US, and that you can office out of your home or other low-cost location.
- PLANNED GROSS SALARY: $100,000
- ADD TAXES and BENEFITS: Let’s say 25%. $100,000 + 25% = $125,000
These might include the employer portion of FICA taxes, a SEP/IRA contribution, health and disability insurance premiums, etc.
- ADD BUSINESS OVERHEAD: Let’s say 20%. $125,000/80% = $156,250
This is your cost of being in business, which includes office space, supplies, technology, phone and internet services, books and professional training, marketing expenses, etc. My experience in tracking this for myself is that it runs about 17% to 22% of my gross depending on my investments in technology and training that year. The result is the amount you would need as gross profit to get the salary you want to make.
- UNADJUSTED HOURLY RATE: $156,250 / 2000 hours = $78.13
This would be the rate if you could bill every single hour of your day, which is nearly impossible as an external consultant. Let’s assume 2000 hours. (2080 weekday hours in a year less 80 hours for a two week vacation.)
- ADJUSTED HOURLY RATE: $78.13/.33 = $237 per hour /about $1900 per day
This is based on a realistic assessment of how many hours you could actually bill. If you are an independent consultant who sells their own services, marketing takes time that is not billable. You also have administrative time in running your business, unbillable class time for your own personal development, etc. To be conservative, let’s assume that you can bill about 1/3 of your time, or about 8 days per month.
Thus in this example, your starting rate for further tweaking would be $237 per hour. In my next blog, we’ll talk about ways to adjust that based on how you want to position yourself and what the market will bear, so stay tuned!