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Setting hourly rates for Consultants and service providers

© December 2005 Tony Lawrence
December 2005

If you are doing anything that includes an hourly or daily rate, you probably have some idea what similar businesses in your area are charging for the same work. There's usually a range, and you need to decide where in that range you want to be.

Before you get to that, though, you need to know what your overhead is and how much you want to take above that. Whatever figure you come up with, start by dividing it by 20 (assuming a one man shop). That's your minimum hourly rate.

Why twenty rather than forty? Because you may not be able to bill forty hours in a week, either due to lack of work or other factors: prep time, re-do's, research, training, sickness, vacations and other unexpected time wasters all add up. Figuring 20 hours billable per week is generally a good place to start; if that amount is way too high compared to what other people charge, you need to rethink your business plan, cut overhead, or be prepared to make less money than you think you will.

So, if you need $100,000 a year to cover your overhead and desired salary, your billing rate needs to be a little over $96.00 an hour. If the range for similar work is in the $65.00 to $130.00 area, you are right about in the middle. If it's more, you may be at the low end, which is good because you would have more choice in setting your rate.

Should you be high or low? That answer always depends, but one thing to consider is your growth plans. If you plan on hiring more employees (should you have employees?), you may want to set your rate toward the lower end in the hope of attracting more business. But there are arguments to be made for the high road too:

There are people who set their rates much higher than any of their competition. These people stress quality and satisfaction much more than price. As one such workman said to me, "I could do the job for less, but you wouldn't want me to. First thing that went wrong, I'd be looking for a way to make up for that time by hurrying something else. Better to just pay me what I want and let me do it right". While that may sound like the province of the lone wolf, it can apply to people with employees too: if your rate is high, you can more easily afford to send people back to correct real or imagined errors.

The very worst thing you can do is set your rates so low that you aren't making what you really need to make. You may think that your competition is forcing you to that decision, but if that's really true, just close the doors now because it's not going to work. I once belonged to a small, independently owned gym who felt threatened by the franchises offering $99.00 yearly memberships. The owner matched that rate, but then couldn't afford to maintain the equipment and even had to cut back on heat in the winter. Naturally, he started losing customers. I told him he needed to raise his rates to two or even three times that ridiculous $99.00 price. He felt he would lose customers, and yes, he would have lost some, but most of the clients came there because they didn't want to go to the big franchises. Most of us were middle aged business people or stay at home moms who didn't want a gym full of young muscle builders. As his $99.00 price attracted a few of them too, we had even more reason to be unhappy, so more of us left. Within a short time, he was hanging on by his teeth, and surely would have gone out of business soon had he not unfortunately died from a heart attack.

If you are going to make a mistake on price in a service business, it's usually better to err on the high side rather than the low. You can always adjust your billing for unusual circumstances; I'll sometimes charge four hours for work that actually required five if I feel that five was "just too much". You can also offer lower prices for larger chunks of work, or have other incentives like coming back the following week to check on work done. It's hard to offer the little extras if your rate is extremely tight. Keep some extra profit in there and you have more room to play.

Something else to think about: very high rates may mean long idle times between work. That might be exactly what you want, but it can be very unsettling for others. Undercutting normal rates may keep you flooded with work, but that creates its own stress. Finding the point where you and your customers are happy isn't easy..

Got something to add? Send me email.

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