Pricing
How to go about setting the prices for a consulting company
If you charge too little, you won’t prosper in business. If you charge too much, you won’t get any clients. So how do you find that middle ground that seems fair to everyone involved?
One way to help you decide how much to charge is to find out what the competition’s rates are. A simple telephone call, asking for their brochure and rates, should do the trick.
Then set your rates so that you are competitive with everyone else in the community.
List all your expenses
Before setting your fees, make sure you have listed all of your expenses.
There is nothing worse than setting your rates, having your client pay you on time and then finding out you failed to include several expenses that materialised.
This brings up an important point to remember in every job you take from a client: be specific about what your fee includes and what it excludes. Most clients will understand that in every project, there will no doubt be additional expenses. Just be sure everyone knows upfront an approximate figure for those expenses.
Check the competitions rates
Before you set your rates, find out what other consultants in your community are charging for their services.
You may have to have a friend call and ask for their brochure, or any additional information they can collect regarding fees and pricing.
When setting your rates, you have several options, including hourly rates, project fees and working on a retainer basis. Let’s examine each one closely.
Hourly fees
- You need to tread carefully when setting hourly fees, because two things could happen: Your hourly rate is so high that no one could ever afford you (therefore no client will ever knock on your door).
- Your hourly rate is so low that no one will take you seriously.
Keep one important rule in mind when establishing your fee, no matter which structure you decide on: The more money people pay for a product or service, the more they expect to get for their money.
In other words, if a client agrees to your hourly rate of R800, then you had better give R800 worth of service to that client every hour you work for them.
Some clients prefer to be billed on an hourly basis, while others pay per project. Many consultants opt for a project rate and then use a pre-determined hourly fee to bill for extra work commissioned outside of the original finalised project specification.
Project rates
When working on a project rate basis, a consultant normally gets a fixed amount of money for a pre-determined period of time.
It is imperative that the deliverables and outcomes are determined upfront and billed accordingly. If details are not finalised the consultant may need to allocate more hours than initially catered for, resulting in the project becoming less profitable.
When it comes to billing by project another important detail to iron out is payment terms. Many consultants create a payment structure that includes a deposit or down payment at the outset of the job and then payments on milestones. Another method may involve the payment split into monthly chunks payable on 30 days of invoice.
Retainer basis
Working on a retainer basis gives you a set monthly fee in which you agree to be available for work for an agreed-upon number of hours for your client. While in the ideal world you would have a dozen or so clients who hire you and pay you a hefty sum each month (and never actually call you except for a few hours here and there), don’t get your hopes up.
Most companies that hire a consultant on a retainer basis have a clause in their contract that prohibits you from working for their competitors.
Working and getting paid in this method certainly has its advantages. You are guaranteed income each month, and when you are starting out in your consulting business, cash flow can be a problem. Some consultants actually offer a percentage reduction in their fees if a client will agree to pay a monthly retainer fee.
Whatever your preferred method of billing, it is advisable to build up a nest egg to cushion your cash flow problems related to late payment. An efficient financial management system is critical to the success of every business.
Take the time required to set up an effective credit vetting, monitoring and collection system.