Profitable Consulting Fees

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1 Profitable Consulting Fees Brought to you by: ConsultingVideos.com Copyright (C) ConsultingVideos.com Page 1(22)

2 Calculate Hourly Consulting Fees - Method 1 - Copyright (C) ConsultingVideos.com Page 2(22)

3 Calculate hourly consulting fees - method 1 Method 1 is only one of many other approaches you can take to calculate your consulting fees but it s perhaps the approach that is most realistic in that it s based on real data and consider your expected living standard. It s designed to avoid guesswork as much as possible. One drawback with this method is that it doesn t take into account the competitive situation so even though the hourly fees you calculated might fulfill your expected living standards and cover for your personal and business cost it might not be in line with what your client is willing to pay. The method consists of seven simple steps and let s start with step 1. Step 1: Calculate your working hours per year Let's make the following assumptions: There are 52 weeks per year You take 5 weeks' vacation You take 7 days off for national holidays You take 5 days off for sick leave A normal workweek is 40 hours Work hours per year are now: (52-5) x 40-7 x 8-5 x 8 = 1,784 hours per year based on the assumptions we just made. Copyright (C) ConsultingVideos.com Page 3(22)

4 Step 2: Estimate your billable hours Not all of the 1,784 hours are billable because you need to spend time on administration, marketing and other non-billable work you can not include in your consulting fees. Let us in this case assume you spend: 30% of your time on marketing, networking and seminars etc. 20% of your time on book keeping and other administrative work Based on this assumption are now only 50% of the 1,784 hours billable so now only 1,784 x 0.5 = 892 billable hours remain. Step 3: Estimate your collection rate Not all your clients will pay your invoices for financial and other reasons so you have to take this somewhat nasty reality into account when you calculate your consulting fees. Let's assume that 5% of your bills don't get paid. Your billable hours are now reduced to 892 x 0.95 = 847 hours per year. Step 4: Calculate your business expenses Typical business expenses are: Phone and computer Office rent Travel costs Insurances Legal services Meetings and conferences Copyright (C) ConsultingVideos.com Page 4(22)

5 This list is by no means complete but should give you a good idea of the business expenses you need to estimate when you calculate your consulting fees. Let's in this case assume your business expenses is $23,000 per year. Step 5: Calculate your personal expenses Typical personal expenses are: Food, entertainment Housing Retirement savings Vacation (hotel, fuel, tickets etc.) Retirement savings is not really a cost but it's still money you need to put aside so i have included it under personal expenses. Let's assume your personal expenses add up to $45,000 per year. Step 6: Estimate your wanted savings Now you have to estimate your wanted savings per year. This is how much you want to put aside for large future investments on top of your retirement savings: House New car Longer vacations Education for your children Contingency money on the bank In this example we assume you want to put aside $20,000 per year. Copyright (C) ConsultingVideos.com Page 5(22)

6 Step 7: Put all the numbers together This is the last and final step when you calculate your consulting fees so all you have to do now is to put all the numbers together. Your total expenses are: Personal expenses = $23,000 Business expenses = $45,000 Total expenses = $68,000. Your billable hours are 847 hours as we calculated in step 3 and your wanted savings are $20,000 as estimated in step 5. The consulting fees can be calculated based on the following formula: (total expenses + wanted savings) / billable hours. Based on our assumptions you get a consulting fee of ($68,000 + $20,000) / 847 = $103 / hour. You can round up your consulting fees to $105 / hour. You can also calculate your break-even hourly fee by using this formula: total expenses / billable hours. Your hourly consulting fee to reach break even is then: $68,000 / 847 = $80 / hour. Copyright (C) ConsultingVideos.com Page 6(22)

7 Calculate Hourly Consulting Fees - Method 2 - Copyright (C) ConsultingVideos.com Page 7(22)

8 Calculate hourly consulting fees - method 2 Method 2 is only one of many other approaches you can take to calculate your consulting fees. This method use the income you would have on a regular job in your geographical area as a basis so it s a little more adjusted to the competitive situation in your industry and the geographical area you live and work in compared to method 1. One drawback with method 2 is that it doesn t take your expected living standards into account. I suggest you use both method 1 and method 2 to calculate your hourly fee s and finally use your intuition for the final decision. Step 1, 2 and 3 are identical with method 1. Method 2 consists of six simple steps and let s start with the first step. Step 1: Calculate your working hours per year Let's make the following assumptions: There are 52 weeks per year You take 5 weeks' vacation You take 7 days off for national holidays You take 5 days off for sick leave A normal workweek is 40 hours Work hours per year are now: (52-5) x 40-7 x 8-5 x 8 = 1,784 hours per year based on the assumptions we just made. Copyright (C) ConsultingVideos.com Page 8(22)

9 Step 2: Estimate your billable hours Not all of the 1,784 hours are billable because you need to spend time on administration, marketing and other non-billable work you can not include in your consulting fees. Let us in this case assume you spend: 30% of your time on marketing, networking and seminars etc. 20% of your time on book keeping and other administrative work Based on this assumption are now only 50% of the 1,784 hours billable so now only 1,784 x 0.5 = 892 billable hours remain. Step 3: Estimate your collection rate Not all your clients will pay your invoices for financial and other reasons so you have to take this somewhat nasty reality into account when you calculate your consulting fees. Let's assume that 5% of your bills don't get paid. Your billable hours are now reduced to 892 x 0.95 = 847 hours per year. Step 4: Calculate hourly rate excluding expenses It s now time to calculate your hourly rate excluding expense. First you have to estimate what you would have earned per year IF you worked on a regular job doing same or similar work. You can find this kind of information quite easily on the internet and it s often free. Copyright (C) ConsultingVideos.com Page 9(22)

10 To start with you can go to and try to find the information you need. It s very important that you look at statistics that is applicable for the geographical area you plan to sell your services in. Your yearly estimated salary should also include benefits you would get if you had a regular job. The salary will, as a rule of thumb increase with approximately 30% when you include benefits. So if you can t find any information about benefits you can use this rule. Next you divide your estimated yearly salary including benefits with the billable hours you calculated earlier. If we assume you would earn $78,000 per year including benefits you can divide this with 874 billable hours. So your hourly rate including benefits but excluding expenses is $92 per hour. Step 5: Calculate your business expenses In this step we will estimate your business expenses. Typical examples of business expenses are: Office rent Phone Computer Travel Stationary In this case you will assume that your yearly business expenses are $13,000 per year Copyright (C) ConsultingVideos.com Page 10(22)

11 If divide your yearly expenses with billable hours you will get $15 in expense cost per hour. Now you just add the expense cost per hour to the hourly rate you calculated in step 4 and get an hourly rate including expenses to $107 per hour ($92 + $15). Step 6: Add a markup fee This is the final step of method 1. You are running a business and taking risks so it s only fair you add a markup fee. Typical markup fees are 10 to 40% and in this example we will assume a 20% markup fee. Now you just add 20% to the hourly rates you calculated in step 5 and you get $128 per hour ($107 x 1.2 = $128). Finally you can round up your hourly consulting rate to $130 per hour. Copyright (C) ConsultingVideos.com Page 11(22)

12 Value Based Consulting Fees Copyright (C) ConsultingVideos.com Page 12(22)

13 Value based consulting fees Now we will take a look at how to calculate value based consulting fees. It s technically quite easy to calculate value based fees but the result might seem ambiguous and it takes a lot of guts to implement value based pricing The steps to calculate value based fee s are: 1. Estimate the value of your contribution 2. Estimate your actual cost 3. Estimate the range in which you can set your fee 4. Determine your fee Let s now take a closer look at each step. Step 1: Estimate the value of your contribution The best way to understand value based fees is probably to use a case study as an example so let s assume the following scenario. A manufacturer had a very bad production yield for one of their products and it had to be improved urgently. They had an extra cost of $180,000 per year for rework due to the poor production yield. Based on your calculations they could improve the yield and reduce the cost for rework to $90,000 per year by replacing some old machinery and improving their processes. The new machinery and process improvements would cost $30,000 as a one time investment. Based on these numbers is the clients value of your proposal $60,000 the first year and $90,000 the following years. Copyright (C) ConsultingVideos.com Page 13(22)

14 After you calculated the value for your client you sat down with your client and agreed on the value your improvement would bring. You also made sure to present your proposal as an investment and not as cost. The key is to convince your client that your proposal is an investment so they will have a return on this investment. And this is the value of your proposal. Step 2: Estimate your actual cost At this stage it s good if you already calculated your hourly consulting rates using method 1 or method 2 because you will need it now. This step can also be done in parallel with the previous step but i have separated them to make the process clearer. After you calculated the value of your proposal you have to calculate your cost for helping your client to implement your solution. In this case you can assume your cost for the labor is $9,000 and you have $1,000 in additional cost for travel so your total cost is $10,000 for this assignment. Step 3: Calculate the range in which you can set your fees In step 3 it s time to estimate the range in which you can set your consulting fee for this assignment. Let s start by repeating the numbers from the previous steps. Copyright (C) ConsultingVideos.com Page 14(22)

15 The value for your client is estimated to $60,000 per year The cost for your work is $10,000 If you ask for more than the client would profit from your proposal they would be rather crazy to buy from you so it s safe to assume they are not willing to pay more than $60,000 in this case. You can of course argue they will also save $90,000 per year during the following years as well and that s a good observation. In some cases you can get more than the initial yearly savings. But in most cases they want a payback of less than a year so we will use $60,000 as the upper limit in this case. You also want to recover your cost so the lower limit for you is at least $10,000 We can now easily calculate that the range you can charge your client is between $10,000 and $60,000 I can now hear you saying - but that s too vague, i want to know exactly what to charge the client. With value based consulting fees there is no absolute truth. You will need to use your intuition to set your fee s and have guts enough to ask for it. But there are of course some guidelines you can use to determine if you should aim for the upper or lower part of the range. Copyright (C) ConsultingVideos.com Page 15(22)

16 Step 4: Determine your fee In this table you can find some criteria s that helps you determine if you should aim for the lower or higher part of the range. Criteria Consulting fee range Upper half Lower half References/track record from similar project Good None Level of competition Low High Work environment Bad Good Potential future benefits from the project None Many Risk for running over budget (uncertainty) High Low Commitment from client (warning if low) High Low Relationship with client It depends... Let s go through the criteria s one by one. If you have lot s of good references and a good track record for implementing the same or similar solutions you have a good opportunity to ask for a higher fee. If you on the other hand have no references and no track record it s difficult to charge a high fee. The level of competition plays of course a big role in this as well. With little or no competition you can obviously charge more and with fierce competition it s difficult to charge a high fee. Copyright (C) ConsultingVideos.com Page 16(22)

17 If the work environment is bad like for instance stressful or noisy you should ask for a higher fee and if it s good you can reduce your fee s. If you can t use this project as reference or use it for other future benefits you should ask for a higher fee. But if you see many future benefits you can charge a lower fee and hope to get your investment back many times over in the future. If there is a high risk due to uncertainties that your work will take much longer to complete you need to add a contingency and ask for a higher fee. If on the other hand the project is very predictable you can ask for a lower fee. If the client has realized that they need the improvement and is highly committed you can ask for a higher fee. If they on the other hand aren t committed they re probably not willing to pay a high fee. You might not want to take on the assignment if the client is not committed because it often leads to problems. Especially if they pay you on completion of the work. Always ask to be paid in advance or at least get a retainer fee before you start if you suspect the client is not committed to the project. It will help to put some pressure on them to complete the project. Your relationship with your client plays a big part in how much you can charge. If you have a good relationship you can ask for more money but the question is - should you do it? Copyright (C) ConsultingVideos.com Page 17(22)

18 You might want to reward a good client with lower fees to keep the good relationship. If you on the other hand have a bad relationship with your client it s difficult to charge a high fee. And in this case you should ask yourself - do you really want to work for this client? So while there are no absolute truth about value based consulting fee s you can use the guidelines in this slide to determine where in the possible range you should set your consulting fees. Copyright (C) ConsultingVideos.com Page 18(22)

19 Typical Business Expenses Copyright (C) ConsultingVideos.com Page 19(22)

20 Typical business expenses Accounting Advertising Business cards Business licenses Car lease Car maintenance Cell phone Computer - laptop, desktop, network etc. Computer software Copyrights Electricity Employee wages Fax Fee s for seminars, conferences and trade-shows Fixed phone Gas Gasoline Incorporation Insurance - car, theft, fire Insurance health, life, disability, liability, etc. Internet connection Legal services Magazine subscriptions Market research Marketing Membership fees Office cleaning supplies and services Office furniture Office maintenance Other utilities Paper Patents Permits Copyright (C) ConsultingVideos.com Page 20(22)

21 Printer including ink and paper Professional associations Rent or mortgage interest Representation Shipping, handling and postage Stationery Taxes Trademarks Training Travel Water Web hosting Website development Copyright (C) ConsultingVideos.com Page 21(22)

22 Get Free Video s how to Start a Successful Consulting Business At: ConsultingVideos.com Copyright (C) ConsultingVideos.com Page 22(22)