How Much to Charge

Recently attended a function where an associate mentioned he had been asked to do some consulting. Clearly this was something he could do quite easily having been a partner in a successful business for a number of years before going into semi-retirement. However, the question was one of how much to charge for this service.

This is something everyone who does consulting is challenged with. I suggested a rate of $150./hour which for an 8 hour day would work out to a day rate of $1,200. Extrapolated to a normal working year of 252 working days that equals an annual salary rate of $302,400. Not bad earning at all.

However, we all recognize that consultants do not have the opportunity to work 8 hours a day every one of the 252 working days of the year. So let's say you work only one day in three. That brings your annual earnings down to $100,800. which is still good money.

The challenge of course is to justify the rate. Here there are a few different scenarios generally followed.

Scenario One: Charge what the market will bear. If everyone else is charging a rate of $200./hour then charge that rate. The theory here is that you are only asking for what everyone else is getting paid. The problem with this approach is that not everyone brings the same skills / experience to the table. Should the first time consultant be paid as much as the one who has been in the field for 20 years? Something to think about.

Scenario Two: Determine what you would like to have an annual earnings (before taxes). Then estimate the number of hours/days you will be able to bill. Using those two numbers simply do a mathematical calculation to get your hourly rate. I.e. Desired earnings = $100,000/pa and your estimated number of 8 hour days billable = 84 or 7 days a month. Your hourly rate would have to be $100K/672 = $148.81 or $150. for ease of billing. This scenario also has its problem as you might have trouble rationalizing your rate to a client. Also if six months into the year your working days do not average 7/month, do you increase your rate to generate the revenue desired?

Scenario Three: In this scenario you base your rate on the "value add" factor for the client. For example, estimate that as a result of your consulting for a period of say 1 week or 40 hours will provide an increase of say $10,000. to the earnings of the company. The value add is then $10,000. If you charge $150/hour your bill will be $6,000. The company benefit would be $4,000. for $6,000. invested or an ROI of 66.7%. For every six dollars invested in your services the company will earn an additional ten dollars. This scenario often plays better at the board table. When you talk about a return that high, even if the estimated benefit drops to say $9,000. they are still making three dollars for every two dollars invested.

So what scenario is the best to work with as both a supplier of consulting services and a purchaser of consulting services? Clearly there is no right answer other than to say that the scenario which best meets the needs of both parties is the one to use.

Should you have the exact same charge formula for all clients? Again, the answer will depend on a lot of factors, not the least of which is your desire for referral business.