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How much do you charge your clients?
Many people hear about the ridiculous rates consultants charge and are envious of rates that are often two or three times (sometimes more) that of a typical FTE rate. However, those rates aren?t pulled from thin air.
When answering the question, ?How much should you charge your clients?, you first need to answer the question ?How much value am I providing my clients??.
It isn?t about how much money you can give to your clients, but instead, how much value you can provide them.
It is tempting to focus on the amount of money you could charge. In turn this could lead you to forget about the fact that you are actually there to provide value for a client. This is why what you charge your first client should be lower than what you will be charging your second and third. This is all tied to the value you provide a client. Also, another factor many don?t realize is that an hourly rate can plateau your own earning power eventually.
This is when you start creating products and trainings in order to earn far beyond an hourly rate, because you will be providing more value.
Thus, asking what to charge your clients is the wrong question. Instead, you really need to focus on what value you provide.
A video explanation
Your first client, charge what you?re worth
Your first client is always difficult to get because you will likely have no references from projects you have consulted on in the past, and the client is basically hoping you are worth what they are paying you. This means the amount you are charging your first client should reflect this.
The truth is, for your first client, you probably won?t do your best work as a consultant, and that is true for probably 90% of people. So why are you going to try to charge some crazy high rate? That is short-term thinking. Instead, you really want to focus first on over-providing value for your client. Not charging a normal consultants rate, we would recommend just charging at what you would make doing the same work as an FTE.
This ensures you are getting paid, but also allows the client to feel like they are receiving a lot of value. You want them to give you a strong reference. A strong reference is worth far more than that extra income you could have been making. Sure, you might have made three times as much on the project, but if at the end of the project you end up with no more work and no ability to market the fact that you worked with that client, then you lost.
We would never say to do work for free or for ?exposure.? You need to be fairly compensated for your work. But the reason consultants charge so much is because they provide the value of being an experienced consultant.
Considering the fact that you might have limited consulting experience, it is OK to charge a little less so you can get the marketing value.
After your first client, it is all about value
After getting your first client, you now have the opportunity to offer more value because you are a more experienced consultant. The reason consultants charge higher rates compared to full time employees is because they should be coming in and offering more value.
Consultants provide value in the way of niche knowledge, guidance, and most importantly, impact. The goal of a consultant is to make the client feel like they got a fair shake on the price.
All that being said, typically a consultant will charge two to three times what their equivalent FTE might make. Now, this is not only because of the value consultants should provide, but also because consultants take on a lot of the expenses that are usually covered by the employer.
A consultant that works privately needs to cover healthcare, legal fees, accounting, and other similar administrative fees. Of course, that still doesn?t equate to an hourly rate that is three times over a typical base salary.
That is where your niche knowledge and ability to guide a client to making good decisions is important. This means taking charge, clearly communicating on what you will be doing, subverting possible issues and delivering the final product. That is what earns you the right to charge as much as you do.
That being said, it can be easy to let the high hourly rate plateau the value you could be actually providing your clients.
The limitations of an hourly rate
Some consultants focus mostly on their hourly rates. There is a limitation to hourly rates that most people might not realize. Hourly rates are always limited to?well..your time. You only have so many hours and most companies are only willing to pay so much per hour. So instead, you need to focus on creating value in other ways.
For example, let?s look at the most extreme example of wealth in the modern era. Jeff Bezos, who has over $100 billion to his name. Let?s say you wanted to make 100th of that, so 1 billion dollars. If you were not taxed and spent no money and made $500 an hour, it would take you over 1000 years to save that kind of money working full time.
Again, this is an extreme example and no one really needs 1 billion dollars. The purpose of this math is more to point out the limitations of an hourly rate.
So how do we fix this so we can increase the amount we make without increasing our hourly rate? Well, we need to increase the value we provide by having a bigger impact on a company as a consultant.
This is where developing a product comes in.
A product can be a training, software or even some form of audit.
All of these products can provide a company much more value than simply consulting. For instance, trainings can go upwards of $5000 for a day because they will impact multiple people in the company. The larger your impact, the more value you provide.
If you train 20 people on how to have a better data science work-flow, and because of that they are able to improve the efficiency of the team by 20% that probably saved the company several hundred thousand dollars. Thus, the $5,000, $10,000, $15,000 you charged for the day is more than worth it.
Similarly, if you develop an analytical product that can improve the ability to detect fraudulent behavior or target customers, this could lead the company to savings that far exceed what you charge for your service. In addition, you can keep using this service over and over again with limited up front cost to you in sense of time.
This is why many consultants will start offering online services like courses and analytical tools. It allows them to multiply their efforts without being tethered to an hourly rate. In the end, high hourly rates are great, but don?t let them limit what you could be making. If you provide the right value, then clients will be willing to pay for it.
Finding the right value to charge your clients is all tied to the value you provide them. Otherwise companies wouldn?t be willing to pay so much for consultants. That is why it is important for you to assess the value your service is providing. If you are a new consultant, even if you are good at the technical aspects, it is ok to take a slightly lower pay rate, don?t get overly distracted by the high numbers. In addition, don?t let your hourly rate cap your plausible income. Attempt to create value beyond just your time. Whether it be a training, a set of video courses, an analytical product or a similar scalable service. It will help you break the hourly plateau and be more fairly compensated.