Pricing your consulting: You’re doing it wrong
I’ve been consulting for almost 11 years. Yeah, that long! I made every damn mistake in the book, but I’m also an obsessive research-and-testin’ fool and I know I’ve become a better consultant than almost anyone else. Since 2009 is allegedly the year of the world’s biggest economic clusterfuck, I thought it’d be a perfect time to share my hard-won knowledge.
Go anywhere online, read any book on consulting, and you’ll find people talking about how to determine your costs, and people comparing their rates, worrying if they’re charging too much… or, if they’re unhappy with their earnings, if they can dare to charge more.
And yet, for all the talking and debating and calculating, just about everyone messes this one thing thing up.
Change your perspective on charging by the hour
Consider what you’re doing when you consult for somebody (or even when you have a job): you’re trading your time today, for money for tomorrow.
By not using your time to do things purely for yourself, you’re losing an opportunity to invest that time for greater return for you in the future — hunting up new work, working on your own projects, learning new things, spending time with your kids, and so on.
You’re literally spending your future, in exchange for money now. Just as surely as if you spent money which can no longer earn interest for you in the bank.
This is an opportunity cost that you have to consider when you choose to do one thing over another. You take the opportunity, and it costs you, because time just keeps marching on and there’s no way to change what you did with the time you spent.
You’re always moving forward and leaving options behind, no matter what you do.
I have, in a fit of pique, called this strip-mining your future. It’s not a bad metaphor. If you’re strip-mining, you better be damn sure the things you’re digging up are diamonds.
Don’t be “that guy”: do something about it
In over 10 years of consulting, I’ve met only a handful of folks who consider the opportunity cost when they’re setting their rates and deciding which projects to take.
So before you take that next project, sit down and consider what it’ll cost you.
And look at your hourly rate long & hard and ask yourself if it’s worth losing the multiplier of your time’s value that you could get if you invested it in a different way.
Shameless self-promotion time? You bet! Another big consulting mistake people make is not tracking their time—especially the time they can’t bill for, like sales calls and writing proposals. You can track both types, sans teeth-gnashing, with the time tracker I designed: freckle time tracking. And I hate time tracking, so if I like it, it must be good.
Good points – I would love to switch from a typical time-based contract to a fixed fee per project, even with the risk of under-pricing and killing myself near project end. Unfortunately, I just don’t see that pricing model taking off anytime soon.
I have been consulting for 16 years.
You’re absolutely right.
I have had a hard time explaining to a consultant why I was on the beach (for much of 2002): I did not want to miss the oportunity of getting a contract for something interesting, due to being occupied with some crappy job.
It was more worthwhile browsing for something good to do, honing my skills, doing things no customer would care about or pay for and going for a swim in the lake.
I cannot agree more!
It does not matter what time unit or deliverable you charge for. It must cover you invisible (oportunity lost) costs just as much as your visible (rent, travel power, food) costs.
Unlike most accountants, mine groked that eventually!
I’ve been working as a freelancer for my entire career, about 9 years now. I’ve been "lucky" in that I haven’t had any major dry spells and have not had to spent much time or energy on marketing other than word of mouth.
However, it seems to me that the trade I made for that was in opportunity cost. I’ve spent some decent spells doing work that was less than satisfying, and not helping me in any way other than getting the bills paid.
After realizing that trade is taking place, it’s interesting to look at the alternative. I could see a scenario in which I would put more energy into marketing myself for very specific types of work, which I would likely be able to set a higher rate for. Even if the net tangible result was the same, the intangible of not going crazy on bad projects could be really worth while.
I’d be really interested in reading more about these issues. Can anyone suggest other technical or anecdotal resources?
I completely agree Amy.
After my first year of consulting in 2001 I realized my pricing was dragging me down. It took two more years to set a pricing scheme that really works for me and my clients. A win-win solution always works best:)
In addition to pricing another mistake many consultants seem to make is not allocating their client time properly (as you kind of mentioned – though not just tracking time, but also balancing client time, other work time and personal time). I have also worked through this issue myself over the last 8 years consulting and found this makes my client time more productive and valuable to my clients. Another win-win.
Now I split my time between consulting work and my own ventures. Another attribute that makes my consulting expertise much more valuable and productive for my clients, because I really do speak and comprehend the same language my clients speak as opposed to spitting out hip acronyms to attract clients like the dime a dozen consultants I’ve seen in Ruby/Rails do so often.
In addition, this last change has meant I only take client projects I am truly interested in pursuing instead of any old client project to pay my bills since I do not solely rely on consulting revenue for income. My motivations are inline with my clients completely, which makes for yet another win-win deal.
I hope more people start blogging about these pitfalls of consulting and will try to capture the content in my comment in my blog perhaps over the weekend.
OMG! I LOVE YOU! This time tracking thing is exactly what I’ve been looking for. A way to track not just the time I spend on projects, but the time I spend on marketing, without driving myself crazy, because I, too, hate time tracking, but I also hate not knowing what I’m spending my time on. Where have you been all my life? Thank you!!!!
@Kelly, I am grinning ear to ear so much it HURTS. I’m soooo happy to hear you say that. It’s been one of those days and your enthusiasm picked me right up. Thank you.
@Andrew, the way you classified it as visible vs invisible is really apt. It seems that most people – especially Americans & related cultures – miss the invisible entirely. Which makes me sad.
@Leslie, "Even if the net tangible result was the same, the intangible of not going crazy on bad projects could be really worth while." So true. Sooooo true. It’s worth it. Same amount of money/fame/whatever external thing + less insanity = big win.
@Susan, yay! You totally wised up at least 2 years before I did. 🙂 Color me ever so slightly jealous.
So. I, too, am interested in discussing these things with likeminded people. I looked around and I couldn’t find any blogs/communities talking about this kind of consulting stuff, without also mixing in all sorts of bad advice. (REALLY bad advice, like articles stating the way to success is to take any and all work possible. Urk.)
How’s about we start a new blog, people?
Who’s with me?
It’s been said that for something to become second nature it takes 10,000 hours ;-).
I’m sure Amy has put in them hours. In the past three years of business I have => about 10,080.
Consulting is different across the world – what happens in the States doesn’t happen in Third World countries.
If we can survive and get paid here, imagine how we would do in a First World Country? (just a thought)
Oh check out: https://gettingreal.37signals.com/
I’m with you there Amy, of course if you’ll have me.
Sign me up, this discussion is a big help.
FWIW, This goes more to what Justin was saying but my view on pricing is value-based.
My client doesn’t really want to pay for my time – they really want to pay for a result…a solution. Time is just a easier proxy to measure than added value.
I find that spending the time up-front to quantify the value of the outcome of the project accomplishes two things:
1) it helps the client focus on the right things…maybe I save them money by forcing them to realize that there’s no value in their project (= repeat business) 2) it eases the discussion of my fee (fixed that is). If all I’m asking for is 10% of the value to the client, it’s a no-brainer. And, it has the added benefit of taking the pressures of "keeping it in scope" or "should activity X be billable" and it means that the client doesn’t have to worry about me over-running their budget on a T&M basis.
I think it would also be a good way to filter your projects as you suggest…perhaps you only work on projects of high value so you can spend more time on your business.