The most frequent question I get from new business owners is: How do you set your fees? My partner launched his own business this year and that was obviously where he started as well. It can be such a confusing process.
I don’t have the right answer for everyone. But I have talked with MANY other consultants about how they do it and some experience with how I’ve done it. So I’m more than willing to share what I’ve done.
You can’t charge for forty hours a week
A popular misconception is that you will be working forty hours a week and you will be charging for each of those hours. Nope. Not possible. You need to leave some time for running your business. You have to market yourself, do some administrative tasks and work with prospective clients. So you want to make sure you have room for all of that.
How many hours will you be working? I’ve always heard that you will be busting your butt if you are working one hundred hours a month, and honestly, that feels about right. I would base your fees off of working eighty hours a month. It will give you some flexibility to feel out how many hours you are actually able to work (since it’s truly a personal decision) and then you can adjust accordingly.
What do you need to make?
Be very honest about this. What is an income that will keep you comfortable? And what amount do you need to cover your costs for software, tech, taxes, etc? Budget it out and even talk to another consultant to make sure you didn’t forget anything. It’s even better if you can share the real numbers with them so they can tell you if are underestimating anything or even overestimating something.
Once you feel comfortable with all of the real numbers you have gathered…
Divide your monthly income needs by eighty
This is pretty simple, but the answer it will give you is not as simple.
So you’ve got your hourly rate. Is it actually competitive with other consultants? Does it need to be lowered or increased? Do some research to figure out exactly where it is falling in comparison to others offering similar services. The best position to be in is that comparable rates are higher than you need and you can decide what you want to do from there. I highly recommend asking for that higher rate, and then you can ride out those periods when you lose clients with more savings.
If you’re finding that your needed rate is higher than average then you have to take a closer look. Is it a lot higher? Are you maybe offering a more specialized service? Or do you maybe have more experience than others? Are you really talking to your competition about their rates? If you are, then you are going to have to bring your rates down into those real world numbers. And if that’s not enough income for you, you will have to evaluate whether this is the right path for you.
And if you do decide to go with the higher rate, make sure you have all of the information to justify it. If you’re continually going up against people who charge less for work, you need to show why your work is not only different but a whole lot better.
Test test test
What you have done thus far has been theoretical and focused on you, not your potential clients. It’s time to figure out if it works.
Start putting your rates out there and collect what potential clients have to say. If they jump on your fees with no negotiations, then you might want to raise them in the future. I, personally, started out asking for a rate that brought in an income that I was more than happy with. I didn’t need much and my rate reflected that. But clients bought what I was selling a little too easily, so I raised them. I now have a rule that if any proposal I put out there doesn’t make me want to vomit, I haven’t asked for enough money. You don’t have to go that far, but it’s what works for me.
If you are getting inquiries and no one is biting on what you’re selling, then you’re charging too much. Charging the right amount is somewhere in the middle. Not everyone is your customer and you should be choosy about who you work with. Part of that choosiness is having a fee that is just enough so no one who isn’t serious will buy from you, but also enough that those who are serious take you seriously.
Because of all that, the testing never ends. Every time you put a proposal out, it’s a new test to see how your fees work for your potential customers. Hopefully, you are able to slowly raise them as you get better at what you do and your needs get more costly. But there’s never any guarantee of that, especially if you are like me and tend to work with your clients for years.
One last thing: You are going to screw this up. You are likely going to ask too little at first. Embrace these mistakes and try to do better next time. You will get there.
How did you set your fees when you got started?