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Consulting Fees And Pricing Structure
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23th January 2022Welcome to the definitive guide on consulting fees and their pricing structure. This is the simplest guide that will allow you to understand the consulting services and their pricing.
Whether you are planning to enter into a consulting business or have already been in the game for years, this guide will be helpful for you.
So if you want to:
- Figure out how much you should charge for a consultation fee
- Raise your consultation fee
- Wish to know the reasonable rate for the beginners
- Want to convince the clients to accept higher fees
Then you will love this guide. So let’s get started!
What is a typical fee structure for consultants?
The typical fee structure for consultants is hourly. The Hourly Formula is charging the consulting services on an hourly basis.
Consultants set up a fixed rate in this fee structure and track your hours. You will calculate the bill based on how much time you spent on your consultation.
This is a simple and easy method. That is why it is most prevalent among consultants. If you have just started doing consulting projects, choosing this fee structure would be the best choice.
The Hourly Method Formula for Calculating Your Hourly Rate
Follow the easy steps below to set up the hourly rate for your consultation project.
Step 1:
Open up Google and lookup for the average salary you can charge for your position. Google will provide you with all the details regarding the hourly rate you can charge as a beginner.
Note down the number on a piece of paper. Here is an example that will help you understand it simply and easily.
Write down the searched query on a paper like this:
“senior marketing manager average salary” = $98K.
This will allow you to remember the exact amount of money you can charge for your fees.
Step 2:
You can find an hourly calculator software online that can help you to convert your average salary into an hourly rate. Type in your average salary number in the hourly converter. Make sure to search for the best tool because this will help you to get the right number.
The hourly calculator will ask you for some details, and you will have to fill them to find out the exact charging fee. For work hours per week, you should enter “20.”
When working as a beginner consultant, you are not working 40-hour weeks, so it is only right to enter 20 in the field of work hours per week.
For work weeks per year, you can enter “48”. If you work for more than 48 weeks, you can always add the number of weeks you plan to work for. You can subtract the number of weeks that you want to take off.
Step 3:
The next step is to round your hourly rate up or down. This can become in 25 dollar increments.
Read this example to get a better understanding: A salary of $98,000 is equal to a monthly payment of $8167, a weekly pay of $2042, and hourly pay of $102.
$102 = $100 per hour.
This will be your hourly fee as a starter.If you feel that it is too low, you can always raise it.Consultants should never undercharge because it takes a lot of time and effort to give consultations. You should never undercharge a client, especially when charging by the hour.
Every time you are done completing a project successfully, you can increase your hourly rate by $25. This will take you to a point when charging by the hour is not the best method for both you and your clients.
Factors to consider when setting consulting fees and rates
Setting your consulting fees and rates is not an easy job. It can be confusing for both beginners and veterans. It is important to examine the average consulting fees other consultants charge in different parts of the world. Knowing the consulting fees and rates in the popular industries is also the best.
This will help you determine the best rate suitable for your consulting business.
1. What amount am I willing to accept for my time?
At first, this question might seem very simple to you, but it can turn out to be difficult when you start to think about it. This factor can be confusing and can be a complex question in your head when you are setting up your consultation fees.
Our time is precious, and we don’t want to spend our time on something that is not benefitting us to the maximum. How much money are you willing to accept if you are a starter? This is the big question that arises in your head when you first start to set your consultation rates.
The answer can be confusing. You want to gain a big amount of money, but at the same time, you know that people might not be ready to give that much money to a starter. It can be hard to convince yourself to charge less because that would be a waste of time.
If you find out that your colleagues are charging more than you are, you will start to have second thoughts about the amount you have set. If your colleagues are making more, you are allured to charge a higher fee than you are charging now.
If you have an unfulfilled feeling after completing a project, it can also raise many questions about the fee you have received. You might also start to feel that charging this little amount of money was a waste of time and effort.
The amount of pay you charge must satisfy your psychological state because that will allow you to give it to you. You should prepare your mind to accept a certain amount so that you can do your best without feeling dissatisfied.
2. What amount are people willing to pay me for my time?
Your psychological complications can be troublesome, and they can raise many other questions in your head as well. You also start to guess the psychological states of the clients that you will be interacting with. Do you often seem to think about how they will rate your services?
Will they be willing to pay you the amount you are demanding? What would be the price which will force them to leave you and look for another consultant? You also have to consider your clients and how much they are willing to pay you.
3. What is the market value that the industry has set?
“The market rate” refers to the average rate that a typical customer is ready to pay for the consulting services that you are offering. If the market rate for an average consultant is $100 per hour, then the “market rate” will be between $50 to $150 per hour.
The market rate is not the ultimate choice when it comes to setting your rates.
This tool will help you to predict customer expectations. The market rate will help you feel secure and safe when you decide the amount of money you plan to charge.
The market rate will also help you identify suitable pricing for you and your clients. It will also allow you to determine based on your level of experience.
If you feel that you have more experience and expertise than the average consultant, you can choose to charge your clients double or triple the market rate.
On the other hand, if you are just getting started, you can charge a little lower than the market rate as this will help you secure your first clients.
Effective Methods For Setting Your Consulting Fees
Number of methods are there through which you can decide how much fee you can charge. Some methods can work well when you are in the initial stages of launching a consulting business. However, many methods seem suitable if your business is already doing well.
Challenging part is to choose the right method. But it will depend on your choice and targeted clients. It also depends on the kind of market you are working in. We have already discussed some of the points in Chapter 2, but now we will look into it with more details.
Here are a few effective methods for setting your consulting fees:
1. Charging by hourly rate
Nowadays, 60% of the jobs are paid at an hourly rate. There is no doubt the same method will be applicable for the consulting business too. It is a simple and trustworthy method in almost every other job.
However, the tricky part is to calculate your hourly rate. It gives us an idea of what we are making hourly at the job.
The simple idea to get your hourly rate is to divide the amount of salary by 50 weeks. These are the total weeks you will work for in a month, excluding the vacations. Divide this number by 40, that is the average number of working hours every week.
2. Charging by Project
There is no doubt that the hourly rate is a flexible pricing method, but it has one disadvantage too. If you work faster and better than others, you achieve lesser payment.
This can cause a big issue as the nature of the projects is quite similar to each other.
You need to engage your clients in your business and set up a website that can be costly.
Everyone likes to have a big amount for the payment, especially the hard work we all have to put in at work. When you charge by the project, it makes a lot of sense. You know what you can offer while the client also knows what they are getting.
3. Charging based on ROI
Ideally, every consultant will like to charge based on ROI, but this doesn’t seem possible in reality. It is just a way to scam the new consultants and service providers.
Some businesses are easily generating a good amount of ROI from consulting services. At the same time, they are not ready to pay according to ROI.
Top businesses already have an idea about what they can do with the consultancy services and solutions. They should pay a fixed rate instead of going for other payment methods.
Most businesses will be ready to give pay based on ROI only if they can’t find an appropriate consultant on time.
4. Charging an initial fee plus monthly retainer
If a top company wants to help consultants enhance their profits, they work hard to find the most diligent students. They also must plan and organize some winning strategies that bring good results.
One of the most workable ways to succeed is to have the initial fee and monthly retainer payment. This payment method turns out to be the best solution for the new consultants.
You will be surprised to know that this method works exactly the way you want it to. Your client will have to pay according to the two-part payment plan. The first payment will cover all the costs when the clients engage with the consulting process.
If we talk about the second part, it depends on the ongoing monthly fee that is a part of the ongoing consulting program.
How does a consultant get paid?
When a company plans to hire or recruit a consultant, they can use a wide range of payment options. However, methods must be favored by the consultancy service providers too. Here are some common options available:
1. Lump Sum
You need to choose a payment method based on the project’s requirements. If you hire a consultant on a lump sum or flat fee basis, keep the project type in mind. When the brief is easy to understand, there will be no complications.
2. Hourly or daily rates
Things become easy when you choose to work with a consultant that charges hourly and daily rates. The client can add the number of days and hours of work to calculate the payment. A consultant can take time to add any extra charges without getting worried about anything.
3. Per unit Rates
For construction projects, hiring a consultant based on per unit rates is the best solution. It makes the consultant work harder on the project, thinking their payment will increase if they give good results.
4. Results-based
Nowadays, many top companies are hiring consultants that are interested in getting result-based payments. The company will reserve some amount out of the total payment in this method until the consultant helps them achieve at least 20% growth.
5. Share based
Most startups like to choose a share-based payment style as they don’t have enough amount of cash with them.
As a result, the client is ready to give the consultant a share in their business. If you plan to give your consultancy service to such a company, make sure that they are reliable.
How do you negotiate consulting rates?
One of the most difficult factors to become a consultant is determining and negotiating your rate with the customer. If you want to make good money as a consultant, you should know how to negotiate your rates. Some tips mentioned below can help you to negotiate your consulting rates.
1. Never be the first one to mention a price
Setting up a good price to negotiate is only possible if you invite the other person to state a price before suggesting a price. This will help you to establish a maximum price or minimum price.
It will also help you to determine whether you are on the right track or not. Employers often ask you for the expected salary when you go for an interview.
If you state a number that is not acceptable for them, you will be disqualified. If you state a low salary, you will be disqualified because they will feel that you are under-skilled. It is best to dodge the question and pass it on to your client.
2. Don’t negotiate yourself
Don’t ask for a too high or too low price if you are negotiating the price. You can bid against yourself; that is worrisome. In this way, you give the other party a chance to choose things according to their requirements.
You intentionally give a lot of ground that shouldn’t be the case. However, the consultant cannot escape this question. Whenever the consultants are called for their services, the company owner will typically ask how much they charge hourly or weekly?
Make sure you say whatever seems suitable under your requirement.
3. Don’t negotiate the price till you aren’t ready
It is pretty basic if you are looking to have a pay rate according to 10-15 hours per week. The first thing is to discuss your work fully and start thinking about your charges.
It is important to have a good conversation and let the company know about your flat rate. In any case, if you are not willing to negotiate a price method, simply don’t make an effort. You need to be fully prepared before making a move!
4. Establish the lowest rate without changing your mind
As we have discussed previously, if you are not ready to negotiate, there is no reason you should. You need to give a thought to ask for the minimum rate. It is up to the consultant what they can have, like the lowest rate.
There is no way you can lose money in this business, especially when selling your services.
If you want to stay firm in this business, keeping yourself confident is the only way to go. When you change your mind and listen only to others, it will not take you anywhere.
5. Walk away, if things don’t work out
Many consultants make a common mistake while they negotiate the pay rates. They keep reducing the price as the customer keeps pressurizing them. Let us assure you that things will not go in your favor if you keep going like this.
When you go to work, there will be many people who will like to hire you. There is no need to reduce your price. Rather increase it by the time you get more popular.
Suppose a customer has a fixed budget of $2000 and can’t pay more than this. In this situation, you can work for around $50 but think about going lower. It is better to walk away when things don’t work out as you can avail other options.
At the end of the day, it is everyone’s dream to earn more when they work harder.
6. Get to know what customers say about your competitors
Sometimes customers make a fool out of a consultant proving their competitors offer services at a lower rate. You can never be sure what a client has in mind, so make sure you work wisely.
You can either ask about proof or simply reduce the charge a little to satisfy the customer. There is a chance that the competitor is actually charging a low price, and you lose your client too.
Conclusion
The good news is that you can start your own consultancy business and get good results. You can read out the guide above to know about all the details. Whether it is the typical fee structure or setting up a consultancy fee, you can get comprehensive information about it. You can read all 5 chapters above a make a wise move in your career. Feel free to express your views and thoughts in the comments section below!
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