Figuring Out Your Billing Rate as an Independent Consultant

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Photo 2930678 | Rate © Shirley Hu | Dreamstime.com

Too many solopreneurs undercharge for their expertise. They don’t know to add a hefty margin to cover things like self-employment tax, business expenses, health insurance, and nonbillable time spent on business administration. Or they haven’t raised their rates consistently over time, or they haven’t switched to a fixed fee. This article explains how to determine your “base rate”, and the external factors that will impact your pricing. (Links to articles on how to raise your rate or switch to a fixed fee are at the end of this one.)

How to Calculate Your Base Rate

Regardless of where you are in your solopreneur journey—just starting out or an experienced veteran—calculating your hourly “base rate” will give you a solid foundation for quoting your rate with confidence. Most consultants tend to use an hourly rate anyway, because it’s the easiest to figure out, there’s less risk of undercharging, and it’s what most clients are used to. Even if your pricing strategy is to use a fixed price or to use a hybrid approach (part fixed, part variable), use your base rate as the building block and to sanity check your package pricing.

 To calculate your base rate, use the “2x 3x Estimate.”

 Start by determining how much you would be paid if you were a salaried employee at a corporation, including bonuses. To get estimates, use websites like SalaryExpert, Glassdoor, Indeed.com, Salary.com, or if you worked in the tech sector, Comprehensive.io. Use these sites even if you just left your corporate job because it’s possible your cost-of-living increases didn’t keep up with the market price for your expertise.

 Next, divide by 2,000. This is roughly the number of working hours in a year.

Then multiply that number by 2, 2.5, and 3 to add the uplift for running your own business. You’ll end up with a range of billing rates.

Factors that Impact Your Base Rate

The 2x-3x estimate will give you a rough idea, but tweak your numbers up or down based on the following factors:

  • Pedigree: Did you learn your craft at a consulting firm with formal training, such as Deloitte or Bain & Company? Or did you learn on the job as an internal resource with a company, and if so, did you have access to formal training? Solopreneurs who come from “name” firms like PwC or McKinsey can charge more than those who come from industry. Similarly, professionals who worked for a Fortune 100 company like General Electric can charge more than people who worked for a little-known company.

  • Local market conditions: Professionals in New York and San Francisco get paid more than those in Cincinnati or Boise—by some estimates, up to 25 percent more.

  • Competition: Are there a lot of solopreneurs in your geographic area who do what you do? The law of supply and demand dictates that clients will pay more when supply is limited.

  • Professionalism: You can skew your rate upward based on your branding and marketing. People who market themselves as independent professionals and operate as small businesses can charge more than those who work as subcontractors.

Tip: Quote a Range of Rates

Knowing your range and your desired target rate within that range is helpful for two reasons.

First, it establishes your floor or “walk-away rate”. Knowing this is important so you aren’t tempted to take a project that will be a bad use of your time. Remember, your rate needs to cover your business expenses and administrative time. Moreover, if you take a project that pays less than your floor rate, your attitude will be affected, as will the quality of your work.

Second, quoting a range instead of one rate leaves room for negotiation that you’ve planned for. For example, “My rate ranges from $185 to $225 an hour depending on the scope, duration, and complexity of the work.” I did this successfully for years. A client never offered to pay the low end of the range, nor the top end either. That was OK though because I was aiming for the midpoint anyway. I was happy, and the client believed they were getting a fair price.

Other tips:

Benchmark your rate to increase your confidence. Do an internet search such as “typical hourly rate for change management consultant in [your location].” If the search doesn’t return hourly rates, convert the salary data using the method above.  

Reassess your pricing strategy as your experience and confidence increase. For example, shift from an hourly rate to a fixed fee so you’re compensated for your intellectual property.

Quote your rate with confidence!

 

~ ~ ~ Additional Resources from PICA: