Starting your own business, especially one that relies on your knowledge or experience instead of selling a physical product, can be highly rewarding, but it’s also pretty tough. You want to be able to share the things you’ve learned and offer advice to other businesses as a way to help them grow. However, putting an accurate price on that experience becomes a very nebulous proposition. Some experts would tell you to charge what you’re worth and never feel the need to apologize. Others would probably mention pricing your services based on what the market can bear, and still others might say that you should assume every client is different and charge them accordingly.
In truth, the answer to monetizing your knowledge draws from a combination of solutions to the concerns listed below. Let’s examine some of the things you should consider when setting your rates.
1. Operating Expenses Won’t Pay for Themselves
Even if you work for yourself and don’t have any employees, there are still operating expenses you’ll need to cover. High-speed internet access, printer ink, cellphone and data usage are all recurring expenditures that fall under the heading of “the cost of doing business.” Additional overhead costs can include business or client lunches, rent, utility bills, equipment maintenance, etc. You’ll also want to allow yourself a travel budget that includes gas money and regular upkeep for your vehicle. All of these expenses, which are recurring expenditures, should be included in your budget when determining how much revenue you’ll need to generate in order to keep your business afloat.
2. Focus on Needs, Not Wants
Your first motivation for starting your own business might have been because you didn’t want to work for someone else any longer. It’s true that many entrepreneurs find great success when going into business for themselves. But in the end, the most important thing about running a business is making money. As such, the first thing you should consider when setting your rates is how much money you need to make for your business to survive. You might feel that charging $75 an hour is great ($156,000 annual salary before taxes, working 40 hours a week), but once you’ve factored in operating expenses, the cost of health insurance and your living expenses, you may realize that this is not enough to cover the bills. In the beginning, spend some time really focusing on what you need to make, and tend to your wants later.
3. Be Conscious of What Pricing Your Market Can Tolerate
You don’t want to charge rates that deter clients from working with you. This can be a concern on both the low and high ends of the spectrum. Undersell yourself, and clients will assume you’re not offering anything of real value. Oversell yourself, and clients will look for a cheaper option. It’s a fine line. Charging low rates, in the beginning, can hurt you in the long run, as this will make it difficult to raise your rates in the future. You may be able to overcome this by providing some of your initial clients with a “grandfathered” rate and possibly charging newer clients a slightly higher fee, but maintaining both tiers can prove tricky. Clients will talk to one another, so make sure your fees are as fair as possible.
4. Realize, in the End, It’s About the Value That You Provide
The truth is that, while you want to be able to charge what you’re worth, clients will only pay for the value they associate with your services. In between those two values is a price that reflects how much the client values your skills and services. This is especially true in areas where a specific skill set or knowledge base is required (i.e. information technology or graphic design). It is possible for you to convince a client of your value by not only providing a compelling pitch or request for proposal (RFP) response, but also by offering testimony from previous clients attesting to the value provided by your services. In these cases, it is best to focus on dollars and cents: how much did your advice, knowledge, etc. contribute to the client’s bottom line? When they can compare the investment in your services versus the returns in revenue, it becomes a much easier decision. Remember to back up your experience with any relevant education, license or certificate. Making it clear how you are qualified can be the difference maker in a client’s decision to hire you.
5. Be Wary of Competition
Unless you do something that no other human on the planet is capable of, there will be competition in your field. There’s no escaping the fact that you will be compared to your competition, and overcoming your client’s scrutiny will be a tricky endeavor that requires a good amount of salesmanship on your part. If clients are looking at multiple consultants for the same work, there will be a tendency to line them up and compare them across the board. This is where the famous “apples and oranges” cliché really gets a workout. Because of your precise knowledge base, you will not offer the exact same service as someone else, even if it looks that way on paper. When meeting with a potential client or responding to an RFP, be sure to stress the ways you are different from other firms or individuals who offer similar services. Some of these differences can be very quantitative (i.e. I have 10 years of experience, while they only have five) or a bit more qualitative (i.e. my approach is holistic/different/more novel than theirs).
Keep in mind that some clients may be comparing your costs to an individual or firm based in a foreign country. While many of these firms do excellent work, differences in economic climates, currencies and distance can drastically affect their asking price.
Calculating Your Rate
After taking all of these issues into consideration, you can put together a fairly straightforward formula to figure out your rate. Here’s one, as published on Forbes, that calculates the daily consulting rate from the perspective of a consulting agency. While this equation is written from the standpoint of a consulting company hiring an employee, it should still be useful for those operating as sole proprietors:
Profit + Labor Costs + Overhead = Daily Fee Revenue
First, we start with “labor costs,” which, for our example, is the money a consultant takes home as an annual salary after all overhead and the company’s profit are taken out. So if your goal is to make $100,000 a year after expenses, you will divide that number by the number of days you expect to work in a year. The article gives us 265 days per year, but of course, this will be more if you end up working weekends and take very little time off. For our example, this consultant’s labor cost is $377 per day. Remember that this is only the consultant’s take-home pay and doesn’t address overhead or company profit.
We’ve already discussed overhead, but here are a couple of important points to consider. It’s estimated you’ll spend about 60% of your working hours on projects for your clients, and you’ll be incurring overhead costs as you work. To calculate overhead, we’ll assume that the consultant spends 60% of his or her 265 workdays (which equates to 159 days) working on projects and incurring overhead. For our example, let’s say that this consultant’s overhead cost is $10,000 per month, or $120,000 per year. After dividing $120,000 by 159 days, we get roughly $755 per day for overhead costs.
Finally, the profit of a consulting company is usually between 15% and 25% of the total expenses/overhead. If we use our daily overhead figure and take 15% of that, our consultant is expected to generate a profit of $113 per day.
Combining these three figures together, the total daily fee revenue you would want to make is $113 + $775 + $377 = $1,245 per day. You can easily convert this to an hourly rate by dividing the per-day total by the amount of hours you expect to work during each day. But keep in mind that for a consultant, the norm is often closer to 10 or 12 hours per day, rather than the typical eight hours
After factoring our consultant’s daily fee rate, that $1,245 required daily revenue can be satisfied by working an 8-hour day at $155/hour or a 10-hour day at $124/hour.
In the end, what you ultimately charge will be the result of a lot of planning, some soul searching and a little trial and error. It’s always important to make sure that you are generating enough revenue to support yourself and your loved ones while your business hopefully grows.