How Independent Consultant Rates and Retainer Fees WorkSep 09, 2022
Table of contents
- What are typical consulting fees?
- How do I structure my fees as an independent consultant?
- How do I determine my consulting rate as an independent consultant?
- The 6 factors that influence your independent consultant fee
- Consulting services pricing models
- Pricing strategies for independent consultants
- The top 7 consulting pricing mistakes independent consultants make
- How to increase your consulting fees
- How to negotiate your consulting fees
- How to calculate your consulting fees
- Frequently asked questions
- Additional resources
One of the biggest challenges independent consultants face is pricing their consulting services. I hear these common questions:
- What should I charge for my consulting services?
- How do I figure out my consulting fees?
- How can I avoid losing this consulting engagement because of price?
- Am I undercharging for my consulting services?
- How can I stop charging based on my time, and trading my time for money?
- How can I charge for my consulting services as a fixed fee without taking on so much risk?
- How do I price my services based on value?
- How can I transition from rate-based work into value-based pricing?
- How can I make retainers work?
Questions about consulting fees are virtually endless.
If not done well, pricing can be lead to the dreaded feast or famine cycle, income plateaus, and burnout in your independent consulting business.
In today’s article, I’m sharing the comprehensive playbook with you on how independent consulting rates and retainers work.
What are typical consulting fees?
Typical consulting fees vary wildly. I’ve seen independent consulting fees range from $85 per hour (that consultant was undercharging by at least 3x) up to $10Ms in consulting fees. The range is significant and based on the nature of the work, the client’s goals and expectations, and the consultant’s experience with selling and delivery.
How do I structure my fees as an independent consultant?
To structure your fees as an independent consultant, you’ll want to triangulate on two things:
- The value your consulting client places on the outcomes, benefits, and impacts you deliver to them (even if you’re not using “value-based-pricing” per se) and
- Your business goals
If you deliver the same type of service repeatedly, set a consulting fee pricing matrix.
Otherwise, if the type of consulting services you deliver varies, establish your fee structure on a case-by-case basis.
How do I determine my consulting rate as an independent consultant?
To determine your fees, consider the 6 factors listed below that can influence your independent consulting fees. But, be careful making assumptions based on these.
I frequently hear from independent consultants that they think their “potential clients will have a challenge paying “high” fees”. Or, that the independent consultant is certain there’s an “industry standard rate their clients are willing to pay.”
When we dig in, we realize this isn’t a fact that their clients don’t have money or that there’s a standard.
Instead, we find the independent consultant (1) hasn’t gained a true understanding of the qualitative and quantitative impacts of the proposed engagement, and (2) the consultant isn’t clear and confident about the value they’re delivering.
You have to sell yourself first before you can sell to your client.
The 6 factors that influence your independent consultant fee
1. Type of clients
The first factor that influences your independent consultant fee structure is the type of client you’re targeting.
Do the clients you’re targeting for your consulting services have money to pay for your services?
For example, are your clients typically start-ups that (truly) have little funding? If you want to work with these types of clients, you would typically structure your fees with a heavier success-based component (e.g. more equity in the start-up).
2. Location of assignment
Post-COVID, the location of the assignment doesn’t need to factor into your independent consulting fee structure.
You charge for the outcome of the work you’re doing, which typically doesn’t have anything to do with where you’re doing the work.
With that said, you may include travel days for specific workshops, strategy sessions, user interviews, assessments, process monitoring, etc.
The industry can be a factor in your consulting fees, but it doesn’t have to be.
I’ve seen early-stage start-ups pay premium consulting fees.
I’ve seen non-profits pay premium consulting fees.
I’ve seen governmental agencies find ways around their typical procurement processes and pay premium consulting fees.
4. Experience and expertise
When you’re setting your independent consulting fee structure, ask yourself:
- What is your expert recommendation for them: What’s the best pricing mechanism for the client to achieve their desired results (e.g. retainer vs. fixed fee vs. value-based model)?
- What’s best for you and your business: How do you want to deliver the work to your clients? What creates the biggest impact for your clients with the least amount of time spent on your side and with the most profit?
5. Nature and duration of the assignment
The nature and duration of an assignment can influence an independent consultant’s rate model, e.g., hourly/day/project-based pricing…
When you’re determining your independent consulting fee structure, here are several questions to ask yourself:
- How can you quantify the impact of the project to this client?
- How will you and the client measure the results of your work together?
- How long do you anticipate the work will take? Do you want to work on projects of that nature, duration-wise?
- Will you have the flexibility to work on multiple, concurrent projects? If not, consider adding a premium to your pricing for the client to gain full access to your availability.
6. Impact and complexity of the project
High-impact or complex projects can open the door for negotiating value-based pricing.
- The client’s desire: What are the expected tangible and intangible impacts created by your engagement? How can I quantify those impacts? How can the potential client get on board with this estimated impact?
- The client’s opportunity cost: What is the impact of the client not doing the work? What is the impact of you not doing the work for the client?
Consulting services pricing models
The 6 typical consulting fee structures are:
- Project-Based/Fixed Fee
- Retainers - where the client pays for access to you in some capacity
- Success-based - where your compensation is tied to the outcome of the project (e.g. a % of the revenue; equity, etc)
All of these structures have pros and cons.
To scale your business, you’ll want to implement fee structures that aren’t tied to your time. In other words, avoid hourly and daily rates.
1. Hourly consulting rates
Hourly rates can be a great place to start as an independent consultant.
Don’t use the hourly rates as a crutch for too long in your business.
If you start out with a hourly rate pricing strategy, have a clear plan and timeline for transitioning out of hourly-based work.
When you’re ready to grow your consulting business, you’ll want to shift out of them into other consulting pricing strategies (e.g. fixed fee or value-based pricing).
What is hourly rate consulting?
Hourly rate consulting is where you charge for your consulting services based on the # of hours you work in a given time period.
Hourly rate consulting can be a common pricing model, especially when you land a consulting role through a marketplace or recruiter.
What are the pros and cons of hourly rate consulting?
Hourly rate consulting can be the easiest way to start consulting, as it’s arguably the most familiar rate structure for both the buyer and also the independent consultant.
It can be the lowest barrier to entry as an independent consultant.
You’ll quickly learn that hourly rate consulting is not an ideal pricing strategy for you as an independent consultant or for your client.
Independent consultants who are charging on an hourly basis are typically under-compensated.
You don’t want your rates to be based off what your client paid the last contractor. That’s comparing apples to oranges, and not reflective of the value you’ll bring.
Your consulting client makes assumptions on what they think one hour of time should cost them. They compare this rate to what they’re used to paying for a contractor (e.g. another pair of hands), and the rate they believe is “fair” does not reflect the value or impact that you’re producing.
Also, hourly rates create misalignment between you and your client. With an hourly rate, you’re motivated to take longer to do the work, and the client can be motivated to question how long the work is taking you and withhold work to save money even though it compromises the outcome.
How to determine your hourly consulting rate
If you decide to quote an hourly consulting rate, here’s a method to calculate your rate:
The typical salary for the type of work you’ll be doing divided by the number of working hours in a year. Then multiply that number by 2 or 3, to account for the lack of benefits and additional overhead you’ll incur.
$200,000 salary /
1960 hours (39 weeks in a working year after removing vacation * 40 hours per week) =
$102 per hour
$102 per hour * 2.5 independent consultant multiplier = $255 per hour
How to implement hourly rate consulting in your IC business
If you’re just getting started in consulting, you may want to start off with hourly-based consulting rates. Treat this as a phase in your business where you’re gathering all the experiences and inputs needed to support transitioning into value-based pricing or a retainer.
Otherwise, I don’t recommend implementing hourly rate consulting in your IC business.
With that said, you may decide to agree to hourly rate consulting as a last resort, if your client insists and you’ve exhausted all the other avenues.
Another option to consider is to agree to hourly rate consulting for a set period of time, and then gather all the details needed to make the business case to transition into fixed-fee/milestone or value-based pricing.
Is hourly rate consulting a good choice for independent consultants?
Hourly-based consulting is the rate type that new consultants typically implement when they’re first starting in their business.
It’s also a common structure when you’ve landed a consulting role through a third-party such as a marketplace or a recruiter.
It can be a good consulting pricing strategy to implement, as the path of least resistance as you get your business started.
Example of how to best leverage hourly rates in an independent consulting business
“Jane”, an independent consultant launched replaced her corporate income working for $85 per hour. She was burned out, and was worried that she was creating a business where she had less flexibility than she did when she was in corporate.
Jane knew that she wanted to transition into a project-based pricing model where her business revenue wasn’t so closely tied to her time.
Her first step was to research the market rates, and she uncovered that she was undercharging by 2x-3x. So, she immediately doubled her hourly rates for all new client work and renewals.
By raising her hourly rates, she was able to create a cushion for herself.
She took on fewer clients and reduced her burnout.
And, she spent the time she gained looking at her current and past clients to created project-based pricing strategies for her business.
When she had this foundation in place, she was able to confidently propose project-based consulting fees to her next clients. Her business became even more profitable.
With this approach, she also set the stage for the next advancement in her business, moving into value-based pricing.
2. Day consulting rates
Similar to hourly rates, daily rates can be a great place to start as an independent consultant. They’re easy to calculate and most clients have experience paying consulting fees using a daily rate.
What are day consulting rates?
Consulting day rates are the pricing scenario where you’re charging based on the # of days you work for a given client.
What are the pros and cons of day rate consulting?
The pro of using consulting day rates, compared to hourly rates, is that you don’t need to keep track of the time you spend at a detailed level. The consulting day rates are more representative of the value you provide versus hourly rates.
With that said, consulting day rates are similar to hourly rates in that your compensation is tied to the time you’re working.
Another drawback for day rate consulting is that clients may ask you to break up your billing into partial days. So, for example, if you work 4 hours, they may ask you to bill half a day. With this, you essentially transition into billing on an hourly rate basis for your consulting services.
How to determine your day consulting rate
The most common way to determine your consulting day rate is to calculate your hourly rate (see the hourly rate section above) and multiply it by 8 or 10.
For example, if your hourly rate is $250, then your daily rate would be between $2000 and $3000.
How to implement day rate consulting in your IC business
To implement daily rate consulting, you will include your rate on your consulting SOW or proposal.
You will also want to specify all the parameters by which the rate applies. For example, you may state that you charge a daily rate anytime you’ve worked on that client engagement and it’s invoiced in whole numbers.
Is day rate consulting a good choice for independent consultants?
Compared to hourly rates, a daily rate can be a better consulting pricing strategy for anyone who is just starting out as an independent consultant because you’re not as tied to the time you’re spending on a client engagement.
With that said, I don’t recommend implementing daily rate consulting in your IC business beyond your first few projects.
When you’re charging daily rates, treat this as a phase in your business where you’re gathering all the experiences and inputs needed to support transitioning into project-based, value-based pricing or a retainer consulting pricing model.
Example of how to best leverage daily rates in an independent consulting business
One of my independent consultant coaching clients had been charging hourly (for years in his consulting business) and was getting burned out. He never said no when a client asked for something, because he didn’t want to give up that billable hour. It felt like a never-ending hamster wheel for him.
As we started diving into his consulting pricing strategy, we uncovered that it was a big leap between where he was (hourly billing) over to project-based-billing-or to value-based pricing.
He didn’t truly understand the impact to his clients beyond providing them a highly skilled “extra pair of hands”.
We created a two-pronged strategy for him to escape the trap of over-working in his hourly-billing model.
The first step was to transition into a daily rate so that he could start the process of uncoupling his billings from the amount of time he worked. He was able to transition his current clients from an hourly rate into a daily rate by showing them an analysis of how their costs would remain the same over a monthly period, and that it would be easier for both of them to track and administer.
Then, as the second part of the strategy, he and I worked through a process to get clear on the value, benefits and impact of the work he does for his clients. We quantified the business case and built a process for him to transition into value-based pricing for all his new clients.
3. Project-based consulting fees
When done well, project-based consulting fees, also known as fixed-fee consulting fees give you more flexibility and potential for profit margin.
What are project-based consulting fees?
Project-based (or fixed fee) consulting fees are where you’ve defined specific scope and charge a pre-set amount for the work.
What are the pros and cons of project-based consulting fees?
The pros of a project-based consulting fee, also known as a fixed fee, are that you have more flexibility to price out the work you’re doing based on the impact as opposed to the amount of your time you’re spending.
The potential con of project-based consulting fees is that, if not done well, you can set yourself for a low profit, no profit, or loss-type consulting engagement. This happens when you underestimate the amount of time (your time and the time of any subcontractors you engage), the amount of materials, and/or if you don’t put specific around the scope, assumptions, or expectations.
How to determine your consulting project fees
To determine your consulting project fee:
- Gather the client’s requirements so you understand the scope
- Get crystal clear on what the client expects from the project, and what the client doesn’t expect
- Understand the client’s budget - the client may or may not have a specific budget; ask questions to understand the ballpark of what they’re assuming so you can address it in your proposal
- Build up your detailed plan, including the time it will take for you to deliver the expected results
- Price out the engagement using an assumed hourly or daily rate. Note: if you will engage subcontractors, be sure to include a 30%-50% mark-up for your oversight and overhead
- Capture any additional costs and expenses
How to implement project-based consulting fees in your IC business
To implement project-based consulting fees in your consulting business, you’ll want to:
- Ensure you have identified all the scope and business-case requirements as part of your pre-proposal process
- Watch out for underestimating or undercutting yourself because you’re worried your estimate is too big
- If the cost is too much for a client, then you’ll want to negotiate on the scope, not by cutting the # of hours you’ve estimated it will take to deliver the work
Is project-based consulting a good choice for independent consultants?
Project-based or fixed fees can be a good choice for independent consultants so you’re not tying your revenue and profit as closely to the time you’re spending to deliver the work, as with time-based pricing strategies.
This type of consulting fee structure can create more flexibility for you as an independent consultant, and can also open up room for you to increase your profit margins and to also bring in other resources to help you deliver the work, thus freeing up your time.
Example of how to best leverage project-based consulting fees in an independent consulting business
Many independent consultants are nervous to propose a project-based consulting fee structure because they think it’s too risky.
I find that independent consultants are able to successfully increase their rates by progressing from daily rates or retainers, into project-based consulting fees, and then eventually into value-based consulting.
You can implement this as a progression as you learn more about the impact on your clients, and the value (both tangible and intangible) that they attach to those results.
4. Value-based consulting fees (sometimes called ROI-based consulting fees)
Value-based pricing can be a powerful consulting pricing strategy for your business. If you’re ready for it, do it. If it feels daunting, there’s no need to rush into it, thinking it’s the “right way” to run your independent consulting business.
What is value-based pricing?
Value-based (or fixed fee) consulting fees are where you base your consulting fees on the client’s perceived value, tangible and intangible, from the services you provide.
What are the pros and cons of value-based pricing?
The pros of value-based pricing are that you:
- Have a higher revenue potential
- Enables you to earn based on the outcomes and value, instead of the time you spend
- Sets you up for a position of strength in any negotiations, because the client isn’t comparing the work you’re doing to what they think is an “acceptable” hourly rate
- Gives you a mechanism to grow your revenue and profits
So, you’re probably asking ‘what are cons of value-based pricing?” For some independent consultants,
- Value-based pricing can feel daunting and hard to implement
- Value-based pricing can also feel difficult to calculate, especially if you’re newer to consulting or if you’ve recently changed your consulting niche.
If you focus on asking a lot of high-quality questions upfront, to understand the client’s value proposition, it will give you the details you need to propose value-based pricing options.
How to implement value-based pricing in your IC business
Follow these 7 steps to implement value-based pricing in your independent consulting business:
- Map out your sales process by working backwards. Answer this – what do you need to know in order to quantify and gain alignment with your client on the the value your consulting work generates? Then, build out a sales process where you get those answers (and more), along with buy-in from your client each step of the way.
- Get into an effective mindset so that you fully believe in the process of value-based pricing and are 100% on board (with yourself) that this is a mutually beneficial consulting pricing structure
- Explain to your potential client what to expect during this scoping phase, so they understand the types of questions you’ll be asking and why. You’ll want them to buy-into the process.
- Execute your consultative sales process.
- Ask the targeted questions to get clear on the consulting client’s perceived value for the consulting work you’ll be doing.
- Consistently talk through the quantitative and qualitative impacts as you go
- Continue this process of requirements gathering and getting clarity until both you and your client are aligned on the impact.
- Quantify the client’s value. Take all the information you’ve gathered and build out a value model for your client.
- Price out 2-3 options for the client, using a ratio between 1:3 and 1:10. For example, if you used 1:10, you would be assuming the client will realize benefits worth 10x your fee
- Do a profit-margin check on your proposed pricing. Add up all the costs you’ll incur (your time, any sub-contractors, administrative support, non-reimbursed expenses) and ensure that your proposed pricing options are profitable.
- Review with your client, as a tool to uncover any last objections and obstacles and to gain their final buy-in and support
- Present your proposal as a formality and as a mechanism to gain approval (instead of a tool to get their feedback and buy-in).
Is value-based pricing a good choice for independent consultants?
Value-based pricing is a profitable pricing strategy for independent consultants. It requires:
- Confidence to lead the client through a process to understand their pain points and value proposition
- Practice to get really good at gaining alignment with the client on the perceived value of the engagement
- Trial and error
Example of how to best leverage value-based pricing in an independent consulting business
Value-based pricing is considered by many as the “holy grail” of pricing models. It’s true that value-based pricing can be the best way to grow your revenue and profits year over year.
With that said, I find that the idea of moving into value-based pricing paralyzes many independent consultants. They want to implement value-based pricing the “right way” and end up feeling stuck and incompetent.
Implement value-based pricing after you’ve had a few consulting clients under your belt and you’re able to know what questions to ask for quantifying the value.
Don’t wait until you feel entirely comfortable. But, you also don’t need to rush into value-based pricing immediately in order to succeed as an independent consultant.
Walk before you run.
5. Consulting retainer fees
Consulting retainers can be a fantastic way to create a consistent minimum revenue baseline in your consulting business.
What are consulting retainers?
Consulting retainers are typically a set, recurring fee for access to a consultant’s expertise.
What is a retainer fee?
A retainer fee is the amount of money a consultant charges for access. The retainer fee is typically for a set timeframe. For example, you might create a monthly retainer in return for a specified amount of access to you in an advisory or mentoring capacity.
What are the pros and cons of consulting retainers?
For you as an independent consultant the pros of a consulting retainer, you’ll appreciate:
- Having visibility and predictability into part (or all) of your revenue stream.
- Retainers also typically give you a lot of flexibility in the way you deliver your consulting services.
- And, retainers typically keep you “out of the weeds” in terms of allowing you to focus on higher-level strategy and the bigger picture as opposed to rolling up your sleeves to do the work.
For your consulting clients, retainers are a benefit in that they:
- Provide access to you as an expert without needing to commit to a full-scale engagement
- Can provide structure and accountability that they wouldn’t otherwise have.
- Provide access to an external advisor who gives them advice and can serve as a thought partner and neutral party.
The cons of a consulting retainer are that they:
- Can require more focus by the independent consultant to ensure the client is fully maximizing the value
- The clients may push your boundaries as an independent consultant when you’re working on a retainer. For example, they may ask you to meet more frequently than you laid out in the contract or may expect you to be on call, to answer questions at a moment’s notice. With that said this “con” is not specific to retainers and is another form of “scope creep” that can happen with any type of consulting service pricing model.
How to implement consulting retainers in your IC business
To implement consulting retainers in your independent consulting business, you’ll want to:
First, get clear on the value and benefits you want your end clients to achieve through a retainer. Ask yourself:
- What outcomes can the client expect from this retainer?
- How would this retainer benefit the client?
- Why would the client want to have me on retainer?
- What would hold them back from agreeing to a retainer?
Then, define the specifics around your consulting retainer offering. Here are several questions to get you started defining and pricing your consulting retainer service:
- The period of the retainer (e.g. monthly, quarterly)
- What type of access the client will have over the period of the retainer
- How will they access you?
- Are there set times you will meet with the client?
- Is there an ad hoc component to their access and if so, what are the “rules” around that access?
- Is there a set number of times over the retainer period that they can access you?
- Will you create any deliverables for the client as part of the retainer?
- What happens to any unused time or work during the retainer period? For example, is it a “use it or lose it” type retainer or does the unused portion of the retainer roll forward?
- What happens if the client asks to exceed the scope of the retainer?
- What is the price of the retainer?
Finally, map out your sales process for your retainer work. Here are several questions to help you define your consulting retainer sales process:
- When will you sell a retainer service - as a standalone service? as a continuation service? as an add-on service?
- What questions do you need to ask to qualify a potential client?
- What questions do you need to ask a potential clients to fully understand their challenges and goals?
- What questions do you need to ask a potential client to understand their perceived value of a retainer?
Pricing models for your consulting retainers
Pricing models for consulting retainers are typically centered around two principles:
1. Pay for access
One pricing model for consulting retainers centers around paying for access to you, the independent consultant. For example, a consulting client may choose to have you on retainer so they have access to your advice, expertise, and mentorship. The way you set up this access can be highly structured (e.g. 2 meetings each month at a set day/time), or it can be very unstructured (e.g. they can text you and you agree to respond within 12 business hours), or it can be somewhere in between.
You decide on the pricing based on the intersection of (1) what you believe access to your expertise and guidance is worth and (2) what you understand to be the value they perceive from access to you.
2. Pay for work
Another pricing model for consulting retainers revolves around paying for a set amount of work each month. A client may pay you for a repeatable set of deliverables that you create for them each month. Examples of paying you for work on retainer are:
- A quarterly strategy where you facilitate a meeting and then provide a comprehensive plan
- Monthly marketing content
- A monthly financials packet
Are consulting retainers a good choice for independent consultants?
Consulting retainers can be a great way for you as an independent consultant to structure your business. Consulting retainers can provide you with:
- A way to bring on multiple, concurrent clients in a sustainable way
- A model where you’re not tying your time to the amount of money you’re making
- A steady stream of income
Examples of how to best leverage retainer fees in an independent consulting business
Retainers are a great way to create a consistent monthly revenue stream for your independent consulting business.
Here are two “real-life” examples of how to leverage these retainer fee model in your consulting business:
1. Independent consulting business where a retainer-fee model is the only service offering
One of the independent consultant clients that I coach has created a consulting business solely focused on retainer fee-based consulting work. She is a fractional CMO who offers her services for 3-4 clients at any given time on a retainer fee basis.
Her clients commit on a quarterly basis to being on retainer and pay upfront.
Her business is predictable and it’s easy for her to manage her capacity and maintain a lot of flexibility in her day-to-day. She’s consistently focused on how to offer her clients more value, to deepen the impact of the retainer for the clients and to keep her retention numbers high.
2. Independent consulting business where a retainer-fee model is one of several service offerings
Another option for you is to incorporate a retainer-fee model as one of several service offerings in your independent consulting business. In this approach, you would map out your capacity plan so you’re clear on your ideal client mix and how you want the retainer offer(s) to fit into it.
I work with many independent consultants who have done just that. Here are some examples of types of retainer-fee offers my IC clients have implemented in their businesses, to give you ideas for your business:
- 1-2 executive coaching retainer clients, mentoring corporate leaders in your area of expertise
- 2-3 CEOs on retainer, to provide them a neutral “life-line” and sounding board
- 1 spot for a start-up company who needs access to an Agile expert to be called on as the company is maturing and running into issues executing
- 2 spots for companies that have implemented the EOS model and who want accountability to the EOS process and troubleshooting when the process isn’t working as intended
- 3 spots for retainer clients who want quarterly facilitation to align on strategy and action plans
- 4 spots for clients who need ad-hoc access to a PR expert who provides expertise in optimizing the outputs of external PR agencies
Pricing strategies for independent consultants
There are 8 types of pricing strategies for independent consultants to consider as you’re scaling your independent consulting business:
- Time-based pricing
- Fixed-fee-based pricing
- Cost-plus-based pricing
- Value-based pricing
- Success-based pricing
- Referral-based pricing
1. Time-and-materials-based pricing
The most common pricing strategies for independent consultants are time-based pricing or time-and-materials-based pricing. These pricing strategies center around you and your client agreeing to how much your time is worth.
Consulting clients are typically most familiar with time-based pricing. They’ve likely paid for a contractor by the hour or a management consulting firm by the day, and they naturally assume that’s how an independent consultant will charge them.
Additionally, consulting clients may have procurement processes set up in a way that most easily accommodates hourly or daily based billing.
Just because your consulting client is most familiar with time-based billing doesn’t mean that they’re not flexible to agree to other types of consulting fees.
2. Fixed-fee-based pricing
Fixed-fee-based pricing is another of the common pricing strategies for independent consultants.
These can be project-based or retainer based.
To calculate a fixed-fee-based pricing strategy, you will build up your pricing from the bottom up. Specifically, you’ll create a detailed line-item plan so you:
- Have a clear description of what the project scope includes (and what it doesn’t include),
- Know exactly how much time it will take to deliver against the scope,
- Have accounted for any subcontractors or other costs you’ll incur when delivering the work,
- Added in “padding” to account for common scenarios such as minor scope creep, underestimations, etc. and
- Have marked up your “bottom line” so that you make a profit.
3. Cost-plus based pricing
Cost-plus-based pricing strategy is used more prevalently in certain industries such as construction management. Cost-plus involves you and the consulting client agreeing to a set % for your profit. Then, to charge your client, you will share all your costs, including labor and materials, and then invoice the client a set % against those costs.
4. Productized-based pricing
Productizing your consulting services means that you’ve created a specific methodology or framework to achieve a specific result for your clients.
Then, when you have a specific methodology, including scoping criteria, you can set a fee for that.
- Executive Coaching
- Software implementations using a “MVP” approach
5. Value-based pricing
Value-based pricing for consulting services is widely held as one of the best pricing strategies for independent consultants. Value-based pricing can require more time upfront to ensure you fully understand the impacts and benefits the client desires and that you’re aligned on how to quantify them.
But, this approach can be more lucrative for you as an independent consultant, such that you work less time and make more money.
In addition, the client can derive more value from the consulting engagement when they’ve contributed to the calculation of the ultimate value they’re expecting to receive from the project and are thinking about the outcomes from that bigger-picture perspective.
6. Success-based pricing
Success-based pricing for consulting services is a lesser-used pricing strategy. But, it’s important to include it here as it can be the fit-for-purpose pricing model in certain situations, especially your independent consulting business matures.
Success-based consulting fees are used when you can calculate the specific impact of the consulting work you’re doing and then you invoice the client for a percentage of the result you’ve delivered. The client could pay you in currency and/or in equity.
- % of a pipeline when you’ve helped the client create a lead generation process
- % of sales when you’ve helped the client create a sales methodology, a sales training approach, etc.
- Equity in a company you’ve helped to scale
7. Miscellaneous types of pricing
Frequently overlooked types of independent consultant fees are:
- Subcontracting - there are typically 2 types of subcontractor models when it comes to your independent consulting business.
- The first is when you include subcontractors in your delivery model and have embedded them into your pricing. This commonly happens in project-based contracts.
- The second type is when you provide resources to a company and charge them a “mark-up” for providing the resources. This starts to veer into a “staffing agency” model so you want to be clear on whether this is the company direction you want to take.
- Referral fees - referring work to other independent consultants when you don’t have the bandwidth or the client isn’t ideal for you
- Licensing fees - the fees paid to you by a software provider, assessment provider, etc. that has “licensed” you to sell their product or service
The top 7 consulting pricing mistakes independent consultants make
There are 7 common consulting pricing mistakes to avoid when you’re determining your consulting fees.
1. Undercutting yourself
It’s common for independent consultants to underestimate the value of the work they do. What you do may come naturally to you, and you might underestimate, overlook, or even completely miss the value, benefits, and impact you create for your clients.
2. Making the pricing about you
There’s a common misconception in the industry that YOU are your business. And while in some ways, this is true for you as an independent consultant, it is not true that you are pricing yourself.
When you think you’re pricing what YOU do, your business becomes a mental exercise to figure out what you’re worth.
Instead, you should be looking at it in the opposite direction. You’re pricing out what your client wants to achieve. The client is not buying your time. The client is not even buying your services.
The client is buying an outcome that they wish to achieve, and are willing to pay for that outcome.
You know you’re undercharging if:
- You have more demand than you can handle
- You haven’t considered or calculated the value of the impact (both quantitative and qualitative) of the work you’re doing. This doesn’t mean that you have to choose a value-based pricing strategy. Even if you’re charging an hourly or daily rate, it’s critical to know the value of the work you’re doing.
- You don’t have a set process for raising your rates (e.g. you haven’t explicitly evaluated whether to raise your rates or consulting fees in the last 6 months, or after your last contract)
4. Misunderstanding risk
Many independent consultants automatically assume that non-time-based consulting fee strategies are riskier.
As a result, it’s common for independent consultants to stick to time-based consulting fee strategies they believe are safer.
Instead, successful independent consultants see that there are also risks with time-based billing.
For example, even if you’re billing based on time, you face the risks of:
- Getting burned out because you’re working to deliver for your clients AND running your business
- Having less influence because the client sees you as more junior than you are
- The client holding back work that they’d otherwise want you to do, because they think about the work on a granular, time-based mentality vs. thinking about the value and outcomes you drive
It’s not true that you need to choose between a safe option (time-based billing) and a riskier option (non-time-based consulting fee structures). All consulting fee structures have both risk and reward. It’s your job as a consulting business owner to mitigate those risks and choose the consulting pricing strategies that are most lucrative for your business and aligned to help the client achieve the greatest outcome.
5. Thinking non-time-based consulting pricing strategies are hard to implement
It’s common for independent consultants to avoid value-based pricing because they think they’re not qualified or that it’s hard.
As a result, independent consultants delay, defer and postpone implementing more lucrative consulting pricing strategies, such as value-based pricing.
Instead of assuming value-based pricing is hard or that you’re not yet advanced enough to implement a value-based pricing strategy, I recommend that you break your business development process down into bite-sized steps.
Answer these questions to make the process of pricing your consulting services less daunting:
What questions can I ask my prospective consulting clients to better understand:
- WHY do they want to undertake this project?
- How will they quantify the benefits of this project?
- What are the intangible benefits from this project and how would they put #’s around those if they had to?
- What’s the impact and cost of not doing this project?
- How will this project impact the project sponsor and decision-makers directly?
- How would completing this project faster (vs. doing it with existing resources) impact the organization?
- What risks would you avoid or mitigate by hiring an external expert? What’s the cost of those risks?
Then, reverse engineer your sales process to capture these inputs all along the way so that you co-create a value-based proposal with your client.
6. Delaying involvement of your potential client in pricing discussions
It’s common for independent consultants to wait to share pricing until the very end of their sales process.
For example, consulting sales processes often look like:
- You might meet with a potential client several times to fully understand their challenges and what they want to achieve by working with you.
- The first time they see pricing is when you send over a proposal.
- You either wait on them to choose one of the options in the proposal or meet with them to review it.
When you’ve waited until the end to reveal your pricing, you could be:
- Underpricing yourself without even knowing it.
- Creating issues for yourself because you didn’t fully understand their thinking or constraints.
- Missing an opportunity to gain their buy-in such that the proposal is a formality.
7. Thinking clients are less likely to agree to a value-based consulting fee structure
If you assume that clients prefer time-based billing and that they would be making a concession by agreeing to other consulting fee structures (e.g. value-based billing), then you’ll miss the opportunity to have those value-rich conversations during the sales cycle about what the client wants, why they want it, the impact of doing so, and the opportunity costs associated with not doing the work.
You miss out on a more lucrative deal and they miss out on creating a business case that not only gives them more clarity but also is a valuable internal alignment tool.
How to increase your consulting fees
How do you know if you charge enough as an independent consultant?
There are 5 ways to know if you’re undercharging as an independent consultant:
- Look at what the market is telling you. Do you have more demand than you can handle? Are you turning clients away and/or overworking?
- Ensure you’re taking value into account when you calculated your consulting fees. If you’re basing your rates solely on time, you will most likely undercharge.
- Ask yourself – when was the last time you changed your rates/project fees? If you haven’t assessed the way you calculate your project pricing after the last contract, this can be a sign you’re undercharging. Many consultants revisit this yearly. Sometimes every few years.
You want to be looking at your consulting fee strategy and not continuously roll forward with what you used in the past.
- Regularly research consulting fee trends as part of your consulting business owner routine. Don’t be afraid to ask colleagues about their rate structures. YOU want to be a detective who is constantly looking for and figuring out WHY your clients value the RESULTS that you deliver, both quantitatively and qualitatively.
- Ask – how do you see yourself as you’re establishing your consulting fees? If you see yourself as someone who is more tactical, you’ll likely undercharge. If you recognize that you’re more strategic, and give yourself permission to see how you’re a thought leader and expert, you’ll create consulting fee structures that are in line with that view of yourself and the results you can help your clients achieve. Give yourself credit instead of underestimating yourself and your impact.
What is the best strategy for setting your consulting fees as an independent consultant?
There are 5 steps to setting your consulting fees as an independent consultant:
- Gather the client’s requirements so you understand the scope.
- Get crystal clear on why the work is important to the client - why the project is important, the impact of not doing the project, why now (vs. later), the quantitative and qualitative value of the outcomes to the client.
- Understand the client’s budget - the client may or may not have a specific budget; ask questions to understand the ballpark of what they’re assuming so you can address it in your alignment conversations and proposal; note: this step doesn’t imply that you should fit within their budget, it’s simply to understand what they were initially thinking in terms of cost and what is driving their thinking. These are important inputs for you as you.
- Decide on your pricing strategy - use the details shared in this blog to determine the best pricing strategy for the type of client and type of work you’ll do.
- Propose 2-3 options to the client for your consulting fees.
- You can mix and match pricing strategies for your options, such as option 1 as a retainer and option 2 as a value-based fee
- Or, you can use a “scope ladder” such that option 1 is the bare minimum (e.g. facilitating sessions that lead to an overall strategy), and option 2 includes the bare minimum plus the next step (e.g. facilitating strategy sessions, documenting the strategy and developing a detailed action plan) and option 3 includes everything in options 1 and 2 plus the actual implementation.
The 3 prerequisites to increase your consulting fees as an independent consultant
There are several ways to increase your consulting fees as an independent consultant. But first, you’ll want to address the 3 pre-requisites to raising your consulting fees:
1. Be clear on what you’re selling (and what you’re not selling)
Many (if not most) consultants get confused about what they’re selling. It’s common as a consultant to think that you’re selling yourself.
You’re not selling yourself unless you want to be a staff augmentation or “extra pair of hands” type of resource.
When you think you’re selling yourself, it’s easy to hit a limit on what you’re charging. And then, you’re constrained by what you think you’re worth and how much your time is worth.
It’s imperative that you decouple YOU from your services.
Your worthiness has nothing to do with what you charge.
And that’s good news.
So, what are you selling then?
As a consultant, you’re selling the outcomes you help your clients achieve.
When you separate the outcomes and benefits you help your clients achieve and start charging for that work, your revenue potential can be endless.
So, the first prerequisite to charging more as an independent consultant is to stop thinking you’re selling yourself.
2. Calculate the tangible and intangible value of the work you deliver.
The second prerequisite to raising your independent consulting rates is to understand the tangible and intangible value of the work you deliver.
I’ll share one of the first exercises I recommend my IC Business Owner clients do, so you can do this as well:
- Quantify the short-term, tangible impacts of the benefits from the work you.
- Quantify the short-term, intangible impacts of the benefits from the work you.
- Add these two together to get a full picture of the overall impact.
- Then, multiply out the impact over the longer term, to see an even broader picture.
For example, you might be an Agile Consultant.
The short-term impacts (tangible plus intangible) could mean that you save your client $500k a year in costs (e.g. retention, avoiding mistakes, code quality, rework avoidance, speed to market, etc.).
And then, over the course of the typical lifespan of the processes you’ve designed (2-3 years), they could be saving $1M to $1.5M.
So, this type of exercise can be incredibly eye-opening for two reasons:
- When you’re building up this type of business case during the sales cycle, it can help you ask better, deeper questions to get a full understanding of the WHY behind why they’re considering working with you.
- When you see the value of the benefits you deliver ($1M to $1.5M in this example), then it can be so much more comfortable to propose higher rates. Increasing your fees becomes a no-brainer when looked at from this perspective.
3. Sell yourself on the rate increase before you ever try to sell it to a client
You have to sell yourself first before you can sell to anyone else.
Most ICs overlook this key, critical step and think the client’s budget or the market determines whether your pricing is in line or not.
It’s not true.
How do I know it’s not true that the client’s budget or the market determines your pricing?
I’ve seen this same scenario play out over and over again, for myself and for my clients.
I want to save you from learning these mistakes the hard way, like I did.
When you think your pricing is too high or you assume that the client won’t want to pay it, it’s a foregone conclusion that you would show up with hesitation and come across as tentative.
You end up undermining yourself, and your expertise.
This doesn’t work.
Let’s look at the alternative.
If you fully understand the value of the work you do, believe in it 110%, and believe the pricing is a no-brainer, then you:
- Will show up in a leaderly, confident way.
- In turn, you build trust and confidence with the potential client.
Do you see how your thoughts about your pricing are at the core of how you come across during the sales cycle?
Your confidence doesn’t come from the numbers on the proposal.
Your confidence comes from the quality of your thinking about those numbers.
The key here is to cultivate and build up your unshakeable belief in your pricing and results, and not to delegate that to your potential clients.
4 ways to increase your consulting fees as an independent consultant
Increasing your consulting fees as an independent consultant requires you to implement repeatable business processes related to your consulting pricing. For example, add the following business-owner tasks to your business plan:
- Add “re-evaluate pricing structures” as a recurring, quarterly action item to your consulting business calendar.
- Conduct a post-action review after a consulting contract is executed. Identify the areas of opportunity where you could raise your fees the next time you land a similar engagement.
- Conduct a post-action review after you complete a consulting engagement. Identify the areas of opportunity where you could raise your fees the next time you work on a similar engagement. What do you know now that you wish you had known when you priced out the work? What adjustments do you need to make to your pricing?
- Treat an extension as an automatic opportunity to revisit your consulting pricing structure. For most independent consultants, they assume that an extension will have similar, if not the same rates. They don’t want to “rock the boat.” So, they agree to the same pricing structure without challenging that assumption. For you, flip this assumption 180 degrees. Instead of justifying why rates should change, implement a business process where you automatically assume that rates will change and then justify why they should or should not. This one small shift can make all the difference in growing your consulting revenue.
How to negotiate your consulting fees
The first question is – do you even need to negotiate when it comes to consulting contracts?
Common thinking could lead you to believe
- your clients will want or expect to negotiate,
- that you should always negotiate (as a “good” business person),
- that negotiation almost always happens toward the end of the contracting process, and
- that if you don’t negotiate, you’re leaving money on the table.
How to make negotiations for consulting fees unnecessary
It’s the exception, not the rule, that you would need to “negotiate” on a final consulting statement of work (SOW).
Negotiations are more common with time-based rates and/or if your buyer/stakeholder is in the Procurement organization.
To avoid negotiations, you can:
- Charge a non-time-based consulting fee structure
- Ask budget-related questions throughout the sales process, from the outset, so that you understand what the client values, what they’re expecting from a financial perspective, and their potential internal blockers (e.g. budget, cash outflow, financial approval limitations, internal alignment, etc.)
- Don’t wait until the end. Begin gaining buy-in and co-ownership for your recommended approach, scope, value calculations, and timelines during the first meeting and throughout your business development process.
Shift your business development process so you’re essentially “negotiating” or “aligning” throughout, from the first call all the way to contract signature and kick-off.
What to negotiate when it comes to consulting fees
There are times when you aren’t able to get alignment during the proposal definition phase, and you’re left in a position where you need to negotiate.
Here are the 4 steps to negotiating consulting fees:
- Diffuse the term “negotiating”
- For most independent consultants, we freeze or panic at the thought of needing to negotiate.
- Negotiating feels hard. pressured, and awkward.
- Don’t set yourself up for failure before you even begin by thinking about this process as “negotiation.”
- Instead, think about the process as “pre-consulting”. At the core of this, you are truly using your consulting skills to create alignment. Reframe the process in order to show up in your most effective mental state.
- Do your mental preparation as a business owner
- Make sure the way you’re thinking about yourself is boosting your confidence and your ability to create a mutually beneficial path forward. Redirect the thought processes that create self-doubt and fear.
- Make sure the way you’re thinking about the potential client and their motivations sets you up for success. For example, if you’re going in thinking they’re trying to get as much as they can out of you, it will be much harder to listen and to ask good questions about their drivers than if you go in thinking it’s possible they’d like to find a solution that’s good for both of you.
- Don’t feel rushed. The client may want to get started quickly and you may feel pressure to come to an agreement so you can begin the work. This feeling of being rushed almost always works against you. Instead, think about the fact that the work has already started in terms of building out a plan and an approach. Don’t put pressure on yourself to “get it over with” and you’ll almost always negotiate against yourself from this state of mind.
- Ask yourself high-quality questions to prepare for the meeting:
- What are my walk-away/good/better/best outcomes?
- What does my stakeholder care about?
- What options could I provide (that protect your margin, time, etc.)
- Show up to the “negotiation” with your consultant hat on. Use your consulting skills to create alignment:
- asking questions,
- getting to the root causes,
- uncovering the unstated influences and motivations,
- understanding their drivers, and
- creating common understanding and alignment
How to calculate your consulting fees
To calculate your consulting fees as an independent consultant, you’ll want to triangulate on 3 factors:
- First, get clear on the impact that your work will have on the client stakeholders and organization. Quantify both the tangible and intangible impacts over a period of time that seems reasonable to you. Create a grand-total impact valuation.
- Next, do a bottom-up assessment to understand all of your costs to deliver against the project. Add up all the time you (and any subcontractors, assistants, and/or specialists) will spend on the project, including buffer for unforeseen issues, underestimation, and minor scope creep. Attach a monetary value to your time for the purposes of having this data point. You can use your “standard” rate for this calculation, as a way to double-check your pricing. You don’t need to submit your time-based rates unless you’ve decided that’s the rate type you want to use in your current business model.
- Then, compare the two numbers you came up with in steps 1 and 2 with what you know the client is expecting. Is your value-based calculation in step 1 (assuming it’s larger than the # in step 2) in line with your client’s expectations? If so, you can include pricing in that range in your proposal and move forward.
- If your pricing is higher than the client expects, then you’ll want to re-align with your client:
- Is there a signing authority constraint that could be solved by breaking the work into multiple phases?
- Is there a budget constraint that could be solved with a more detailed business case (using the data points you created in step 1 above)?
- Is there a cash flow issue that could be solved with different payment terms?
- Or, is there something else that is causing the client to push back on the pricing?
For additional resources and recommendations related to how independent consultant rates and retainer fees work:
Consulting fees calculator
If you’re looking for a consulting bill rate calculator, MBO Partners has created one for you.
Value-Based Fees (3rd Edition): How to Charge What You're Worth and Get What You Charge by Alan Weiss
Frequently asked questions
Which IC consulting services pricing model is best?
Many in the industry would say that offering value-based consulting services is the “right” way to do it.
Value-based pricing has become the model that most independents aspire to.
But, here’s where that can backfire.
When you haven’t implemented a value-based pricing model and you think you should, you end up:
- Second-guessing yourself as a business owner, and tanking your self-confidence
- Rushing into value-based pricing without having the a solid business development foundation in place
It’s a a colossal waste of time and energy thinking there’s a “best pricing model” and that you’re “doing it wrong” if you haven’t implemented that pricing model OR if you’ve implementing it but it’s not yet successful, becomes
The “best” consulting pricing model the model that you choose to offer to a client and that they accept, and where you have little to no regret.
How can you change consulting pricing model for existing clients?
It can be more challenging to change or raise consulting fees for existing clients. With that said, it can be done without a negative impact to your client relationship.
To change the consulting pricing model for existing clients, it’s best to find an inflection point:
- For fixed-fee-based work or value-based work, a good inflection point is in between project phases.
- For time-based or retainer work, effective inflection points are at the notice period in your contract or 1-2 weeks prior to your next invoice (for future work).
With this said, don’t overthink it or wait until the perfect time. Decide you’re going to raise rates, choose a time to discuss with, or notify, your client, whichever makes the most sense for your scenario, and then do it.
You’ll want to change your mind.
You’ll want to think that now isn’t the right time, that another time in the future would be better.
Know that your brain is trying to talk you out of doing something that is uncomfortable and even a bit scary.
That’s a normal part of the process.
Make the conversation simple.
Avoid overexplaining and justifying, where it’s easy to slip into an awkward, graspy energy and not come across as expertly and in command.
Should I offer a high consulting rate right from the start?
First, keep in mind that “a high consulting rate” is arbitrary. Some independent consultants may think that $300 per hour is “high” while others think that’s a standard, starting rate.
With that in mind, offer the consulting fee structure and consulting rates that you have sold yourself on first.
If you’re able to sell yourself on what you think is a “high” rate or fee, do it.
If you’re not able to sell yourself on what you think is a “high rate or consulting fee, then either work to sell yourself first and/or notch your pricing down slightly until you are fully, 100% sold on what you’re proposing.
Episodes from the Grow Your Independnet Consulting Business Podcast:
- EP. 037 - 5 Ways You’re Under-Earning as an Independent Consultant
- EP. 050 5 Methods To Uncover If You’re Undercharging as a Consultant
- EP. 051 The 4 Root Causes for Undercharging as a Consultant
- EP. 052 The 5 Steps to Overcome Undercharging
- EP. 059 Consulting Greed
- EP. 061 What's Standing In the Way of You Making More Money With Less Worry In Your Consulting Business
- EP. 066 The 3 Pre-Reqs To Raising Your Consulting FeesFinal thoughts
The main ingredients to be successful with your independent consultant rates and retainer fees require:
- Align your consulting fee strategies with your consulting business model and plan. Here are some examples:
- Do you know what the process will be for you to quantify your client’s value? If so, you might choose value-based pricing. If not, and it feels like a big leap, you might choose fixed-fee for now.
- Do you want multiple, concurrent consulting clients working on long-standing engagements? You might choose retainers.
- Are you confident you’ll hit your cash flow requirements and you prefer a bigger upside? Choose success-based fees.
- Consider your experience and skillset:
- If you’ve never sold anything in the past (even in corporate or personally), you might choose what feels like the easiest first step.
- If you’ve sold something in the past, even if it’s not consulting, give yourself credit for that. Don’t tell yourself you’re learning something new. You’ve done this before in a different context and focus on where the commonalities are as you choose what consulting pricing model feels best for you.
- Don’t feel rushed to “do it the right way”. That mindset will invariably slow you down.
- Build new skills, to open up more consulting pricing strategies.
- Don’t worry about “failing” or “ruining your one shot with a potential client.” That type of thinking will keep you stuck and small.
- In order to improve at business development, including your consulting pricing strategies, you’ll need to get as many bats as possible.
- Try, fail, learn, improve, repeat.
- Don’t overperfect your approach. Choose a consulting pricing strategy that feels directionally correct and move forward.
- Sell yourself first.