- Nearly 50% of consultants faced market unpredictability as one of the top challenges.
- These 4 pricing models will suffice for consultancy businesses – hourly pricing model, per-project pricing model, retainer model, and value-based model.
- Showcasing value to potential clients let consulting businesses quote rates comfortably without any chances for negotiation.
As per a study by Statista, nearly 50% of the consultancy respondents said that market unpredictability was among the most significant challenges faced.
This unpredictability factor can decrease demand for consulting services since clients are cautious about spending on projects.
To mitigate this, consulting firms must stay updated on industry trends and market demands and diversify their portfolio to be flexible with their prices.
If you haven’t got the hang of the right consulting fees, you may see clients dropping out at the very last minute.
Here’s everything you need to know to set your consulting fees rightly!
- How to determine your consulting fees: A 5-step approach to effective pricing
- Average hourly consulting rates by industry
- Frequently asked questions
How to determine your consulting fees: A 5-step approach to effective pricing
A consulting business that charges too low faces a struggle in meeting its expenses, and those who charge extra may lose clients. This is why businesses must know their average consulting fees and how to determine them effectively.
Step 1: Begin with understanding the value of your consulting services
If you have difficulty deciding how much to charge for your consulting clients or what should be your ideal initial fee, you need to understand your value first.
To do that, you’ll have to…
- Identify your skills and expertise
List your skills and the years of experience in each service you provide.
Assess each area, and then determine your expertise level.
Clients easily pay a premium for consultants who have a proven track record of success and can present unique services.
Check the market demand for a specific skill set you possess, and then communicate your value proposition and set your consulting rates accordingly.
- Discover your USP
Every business has its own USP that helps them differentiate from their competitors.
Your USP should define what you’ll provide differently. For example, it could be in terms of the pricing or the value-based service that is hard for competitors to beat.
- What is the one thing that defines your consultancy and differentiates it from the rest?
- Why should customers choose your service over others?
Identify that, and you will have discovered your USP!
For example, Willis Towers Watson, an HR consulting and risk advisory firm, acutely explains what they do.
See the example below, how a clearly defined USP is complemented with a calming background image.
- Understand the value you bring to clients
There are two different ways of determining the value of your service.
The first way is through objective factors such as your years of experience and the clientele base you’ve worked with.
The second way of determining value is through a subjective perspective based on individual opinions or personal feelings.
Here, the value you provide either has tangible or intangible benefits.
Tangible benefits are quantifiable and measurable, for example, revenue, reduced labor hours, and more sales.
Intangible benefits are difficult to quantify and measure but are still there. For example, increased relationships and customer satisfaction.
The next step involves considering the client’s needs and why they should give the consulting work to you.
It could be that…
- Your expertise on a subject is what they’re seeking.
- You have the required years of experience.
- Your client does not have the time to do it.
Based on these ideas, you must determine whether you want to charge an hourly fee like $50 or $ 100.
Usually, new consulting firms or, more precisely, new consultants think they can acquire more clients if they set their rates lower than the market standard.
But that is a counter-intuitive approach to determining one’s worth to their clients.
Going low as $20 or $25 per hour wouldn’t make sense as the amount of work will remain the same, but they will struggle to cover their expenses.
You need to keep the estimated hours or your efforts in mind and stick to a consulting rate that doesn’t harm your revenue goals.
Step 2: Consider factors that can influence and help in determining your consulting fees
As discussed in the first step, you must know your worth, as this is one of the prime factors in setting consulting fees.
Apart from this, there are a few more noteworthy factors.
- Experience & services
List the services you provide and the experience you have in each of them.
That will enable you to set a base pricing range for each service.
- Market rate
Clients will only pay for your services if the rate you set at least matches the average rates in your industry.
Don’t let this deter you from charging a premium price package.
You may use a result-oriented approach that has greatly benefited previous clients.
Or present your expertise in solving a particular issue that only a select few consultancies are capable of to open doors for setting premium prices for your services.
- Demand and competition
You need to assess market demands and set your consulting rates that resonate toward achieving your goals.
Initially, you can set the lowest acceptable rate for your services, and as the demand rises, you can increase the prices gradually.
Look at the pricing of your ideal competitors, as there shouldn’t be an indigestible difference.
However, you can ignore competitor pricing and set your own if you provide sufficient value.
- Project complexity and scope
With some potential clients, the scope of the project will be unclear. In that case, you can set an hourly rate for your services.
It is also essential to determine the complexity of the project.
Look for situations like…
-Is there an unachievable goal your clients want to see accomplished?
-Is there an improper timeframe that does not match their business processes?
-Does their entire standard operating procedure require a change?
Analyze the complexity of the project and then decide your rate.
- Time and effort required
The time you spend on the project should be another factor to discover.
How many hours or weekdays are you spending on the client? Or are you completely handling the project alone, or is the client assisting a little?
If the project size is large or complex, completing it will take twice the effort. On that note, you may have to charge a little higher.
- Client budget and expectations
You’ll have to assess the client’s budget and his expectations of you.
For example, does the client have the required funding to procure your services? Or is he willing to negotiate consulting rates a little?
If not, then you can ask whether they are ready to exceed their budget or may drop the client.
And if the client’s expectations are high, you can shift the scales in your favor and charge a slightly higher rate for your services.
Another easy way to do is by assessing your past client data to determine your best services, the types of clients that got you maximum business, and more.
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Step 3: Decide on a pricing model
Once you’re clear on the factors while setting your consulting fees, the next step is to choose an ideal pricing model that aligns with your revenue goals.
There are 15 effective pricing strategies you could consider. However, the following four models are ideal for consulting businesses.
|Pricing model||Suitable for|
|Hourly based pricing||Freelance web developers, management consultants, IT consultants, health and fitness consultants, and social media consultants.|
|Pricing per-project||IT consultants, social media consultants, Legal, Financial, marketing, and PR firms.|
|Retainer Pricing||IT consultants, social media consultants, Legal, Financial, marketing, and PR firms.|
|Value-based pricing||Business consultancies, data analytics firms, SEO, and video marketing agencies.|
1. Hourly based pricing
This model works best for those projects where you cannot estimate the completion time. For example, if it will take 30 hours but takes 40, consider implementing this model.
Let’s assume that the average market rate in the US is $50 per hour.
A consultancy with just around five years in the business charges $25- $30 per hour, while a firm with over 20 years of track record may charge $75- $100 per hour.
This model depends mainly on the average market rates.
Here, hourly pricing is not a dependent variable of the market rate. Yet it will still revolve around the average market rate.
There are 2 effective ways to set an hourly consulting rate.
- The 3x method:
Take your hourly rate and multiply it by 3.
Let’s assume that your current hourly rate is $25. Then, multiply it by 3 to get $75.
It is a suitable model for covering costs and enjoying profits.
- 52-week method
Determine how much you want to make yearly. Let’s say $100,000. There are 52 weeks in a year, assuming you don’t consider vacation days.
Divide that by 52 (weeks), which gives you $1923 per week.
Assume you want to work for 30 hours per week.
Divide that number by 30 hours. That gives you $64.
Increase that number by a markup percentage of 25-30% to help cover overhead costs.
That brings a total of $80 per hour.
Suppose you plan to take a 2-week vacation at the end of the year. Follow the same procedure and calculate for 50 weeks (about 11 and a half months) instead of 52 weeks.
Consultancies that provide temporary services such as technical support and training use this model.
- Satisfactory compensation for complex projects.
- A sense of security as clients compensates consultants for each hour worked.
- This model works well for short-term projects.
- Clients may feel uncertain due to the fear of budgets exceeding their expectations.
- Consultants may be urged to work more hours to earn more instead of delivering quick results, thus compromising efficiency and quality of work.
2. Project based rate
Project-based or fixed pricing can be used by consultants when there are defined variables in the scope of work.
It means you set a price for a fixed set of deliverables per project.
This model is much easier than the hourly model to quote rates.
Here’s how to calculate pricing for a project.
Figure out the time it would take to complete a client’s project.
Once you’ve done that, determine how much you want to make per hour for the estimated time.
Add a 20-30% markup to handle costs and unexpected outcomes.
Here’s the formula in one line…
“[(Estimated time to complete + 20-30% markup) * Hourly rate]”
That’s the cost of your project.
This model is suitable for consultancies that are experts in a particular area and can complete projects quickly.
- Allows clients to know the total costs upfront for accurate budgeting and financial planning.
- Consultants can tailor the pricing to the scope and complexity of the project. It allows them to charge satisfactory rates according to that.
- Consultants may find project cost estimation difficult, especially if the scope changes over time.
- May create conflicting interests for clients with lower budgets, as consultants may need to cut corners regarding work quality.
- Some clients will hesitate to pay the full fees upfront.
3. Retainer pricing
This model provides recurring revenue for consultants, done monthly or by providing a set of deliverables each time.
A retainer model depends on the relationship you have with the client say,
Does the client appreciate the quality of your service? or is he genuinely satisfied with your work? If so, you’ve established a good relationship.
Therefore, it is ideal for consulting businesses that have built trust among their clients and are looking to retain their services.
Estimate the scope of work and time to complete. Then include a set-up fee to start the consulting process and an ongoing recurring monthly fee for the rest of the services.
- This model provides predictable income for the consultant over a specific period.
- Continuous revenue lets you focus on efficiency and delivering results within a particular timeframe.
- This model guarantees a scope of work each month, reducing the need for constant business development activities.
- Ongoing communication and collaboration between the consulting business and clients foster stronger relationships.
- Businesses may end up unintentionally under-servicing or over-servicing the client. Lack of transparency may lead to conflicts with clients.
- Clients may request services outside of the scope of the retainer agreement giving consultants unsatisfactory obligations.
- This model isn’t suitable for short-term or one-time projects.
4. Value-based pricing
Value-based pricing is a pricing model based on the value that a service brings to the customer.
Rather than focusing on the service’s cost, this model considers the customer’s perception of value and willingness to pay for it.
You can implement this model based on a certain issue your client wants to fix or a certain result-oriented objective they want to accomplish.
Let’s assume a client wants an ROI of $100,000 in the next quarter.
You can then structure your pricing based on the ROI percentage you’ll receive as payment.
The basic, booster, and premium packages represent different service levels or values that you can provide.
Therefore, you get a percentage cut proportional to the value you provide, as determined by the client’s achieved ROI.
Here’s a sample breakdown of the client’s expectation of a $100,000 ROI.
Basic package – 10% that gives you $10,000.
Booster package– 15% that gives you $15,000.
Premium package – 25% that gives you $25,000.
That way, even if they get $50000 on returns, you still get $5000 for the basic package.
- As both parties align with the same goal, there is a high chance of achieving the best outcome.
- Value-based pricing incites mutual trust and respect between the parties.
- This model encourages consultants to provide unique and innovative solutions to client’s problems, helping them stand out.
- It is a highly subjective model, making it difficult for consultants to quantify and communicate the value of their service to clients.
- Consultants may not receive fair compensation if the project does not deliver the expected results.
Step 4: Calculate overhead expenses
There can be various overhead expenses for any consulting business. Here are the unavoidable ones.
Whether you’re a small or mid-size consulting business, calculating overhead expenses will help determine your profits.
Here’s the trick-Increase the rate by a small percentage that covers costs and gives profit.
Learn how to calculate overhead costs precisely…
- Determine expenses- Fixed expenses (rent and office equipment) and variable costs (business activities such as marketing, utilities, salaries, traveling, and office supplies).
- Add them both to get your overhead costs for the month.
- Next, find the annual aggregate by adding all the expenses. It is the amount of money you need to run your business.
- Calculate overhead rate- This is the total percentage amount your business will spend on providing consulting services.
- Divide variable costs by fixed costs and then multiply by 100. That’s the overhead rate.
Let’s say your business has signed a monthly agreement for $10,000. If your overhead cost is 30%, your business spends 30% of its revenue on providing services.
That leaves you with $7000 per month.
Therefore, you must account for overhead expenses and increase the margin by a comparable percentage to make profits.
Step 5: Establish a minimum acceptable rate
As discussed earlier, your rate depends on factors like standard market rate, demand, value, and experience.
But to show your clients the value they’ll receive from hiring you, you must show valid proof. So that’s how you’ll establish your minimum rates.
Show proof such as expected ROI upon investment, testimonials, and case studies on high-yielding results for past clients.
You can show the same success stories on your website.
Here’s an example of a customer success story on Rapidops, a digital transformation consultancy.
With this, clients can see and understand the value you offer.
That way, you won’t have second thoughts about establishing minimum rates and worry about negotiation.
Step 6: Negotiation
There are some unforeseen situations where the client may not have the required budget, and, in that case, you’ll have to be flexible with your rates.
In addition, he may not see the value of your services first-hand and has already considered some of your competitors for the task.
In this step, we’ll review some tips on negotiating consulting rates.
- Set your revenue goal
Plan how much you want to earn monthly or yearly. Include overhead costs, operating expenses, and taxes into account.
Let’s say you want to make $100,000 per year.
Then you must double that amount or set a 40% premium to cover costs and taxes.
Then your goal would be to earn $200,000 per year, or $140,000.
- Come to a joint agreement
You could negotiate differently if the client’s budget is lower than the base rate you’re charging.
I don’t mean necessarily lowering the rate but offering to provide several deliverables equal to that price.
For example, if your base rate is $3000/week for 30 working hours per week, and your client has a budget of $2000, you could offer to work for 20 hours per week.
- Avoid mentioning prices up-front
In some cases, it is common for the client to ask you for your rate before you proceed into the specifics.
As discussed earlier, avoid and deal with the question by saying it would depend on various factors.
Let’s assume a scenario where your client has an idea to pay you between $ 20,000 – $40,000 a quarter for a project, but you asked for $25,000 instead.
Here you settled in the minimum range of $15,000 less than the maximum.
You’ve lost a lot, and you probably won’t know about it, and your client has won a great bargain.
Sometimes, there isn’t any option but to quote your price if your client doesn’t.
When you mention your price, that becomes your maximum earning capacity. Therefore, including a margin in your quoted price is advisable to allow room for bargaining.
- Stick to the minimum rate
Once you’ve established your minimum price, you’ve got to stick to it. Going lower could create a loss for your business.
You’ll also have to cover the running expenses for the following month. If you’ve gone lower, you will have spent time on a non-profitable project, undermining your value.
We’ve already discussed ways to have firm ground setting a rate by showing testimonials and case studies of the results you’ve achieved for your clients.
Sometimes you may have to go lower when you don’t have clients.
In that case, you may work for them to keep yourself afloat. However, this should only be done as a last resort.
- Sacrifice premium for long-term value
Even if a client has a well-established brand and asks for a lower price, it is crucial to weigh the potential benefits of working with them to increase brand visibility and establish a lasting business partnership.
- Walk away!
Some negotiations will be tough to crack and won’t align with your revenue goals.
If that’s the case, reject the offer politely and tell the client that you could point out some consulting firms that would be a right fit for their business.
This way, both parties part ways on good terms, and you’ll have maintained a sense of professionalism.
That client might even refer your services to others based on your courteous behavior.
Pro tip: If you can show them the value, you’ll provide rather than the expense they’ll incur, you can set high rates for your service and dissuade customers from negotiating with you.
Average hourly consulting rates by industry
|Industry type||Average hourly price range in USD (assuming 52 weeks and 40 hours per week)|
|IT consultant||$150 to $390|
|Social media consultant||$120 to $250|
|Management consultant||$100 – $350|
|SEO consultant||$50 – $150|
|Project management consultant||$70 – $150|
|Data science consultant||$200 – $350|
Note: All the consulting rates’ references were taken on March 2023. Please note that data may vary in the future.
Pricing plays a key role for both; big consultancies and independent business consultants in boosting the opportunity to make money. But unfortunately, some consultants charge wrongly and lose the opportunity to onboard new clients.
Setting an ideal pricing structure is a key challenge when running your consulting business.
And the rising competition demands a careful yet calculated approach to pricing.
Frequently asked questions
How to charge consulting fees per-project?
Suppose a project’s estimated time of completion is 50 hours. Multiply it by the hourly rate and add a 10-20% markup for covering costs and unexpected outcomes.
How to calculate hourly rates for consulting?
You can calculate your hourly consultation rate using these two methods; the 3x method and the 52-week method.
How to charge consulting retainer fees?
Retainer fees vary from industry to industry. For example, you charge $50 for 40 hours per week. That gives you $2000 per week and $8000 per month. Therefore, $8000 should be your monthly retainer fee. Remember to add an initial setup cost or fee. The monthly retainer fee comes later.
How to negotiate consulting rates?
These are some tips that will help you in negotiating your consulting rates:
1. Understand your worth
2. Set a revenue goal
3. Come to a joint agreement
4. Avoid mentioning prices upfront
5. Stick to your minimum rate
7. Politely decline the offer if it doesn’t match your goals
What consulting rates do I need to charge to meet 80k per year?
Use the 52-week method, assuming you spend 40 hours per week on project work apart from business development.
To achieve revenue of 80k per year, the minimum base rate you set should be $40/hour.
Add around 25-30% markup to cover overhead costs, increasing your hourly pricing to approximately $48/hour.
Note: This is an ideal calculation and may not work for you. This calculation only works if you have a consistent pipeline full of leads.
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