A couple of weeks ago, a reader named David wrote inquiring about an offhand comment in a recent post about mentoring where I said:
“A ten-minute conversation with an older female business owner about
the link between gender and compensation totally changed the way I
thought about charging for my services in my consulting business.”
“I was wondering if you would be willing to share more about that “ten-minute conversation” you had.
I ask as my gf is considering leaving her corporate job (ie safety net, ie golden handcuffs 🙂 in favor for her passion of a life coaching pursuit … I know the above quoted segment addresses directly some of her own concerns, so I would be v. interested, AND appreciative, of any real-world insights into the advice of others in appropriately charging for consulting services.”
As I was preparing to respond to David’s email, it occurred to me that this general issue of charging for services is a real stickler for many first-time entrepreneurs. I know that I still struggle with this issue myself, even after eleven years in business.
How do you know what to charge for your professional services?
By professional services I mean things like coaching, consulting, financial advising, writing and web design. Basically, any gig where you sell your knowledge for a fee.
Why is pricing so tricky?
Pricing your services is tricky because there is no magic formula or “correct” answer. I see four distinct parts of the pricing equation: psychological demons, practical needs, external market and financial results.
Part One: Psychological Demons
To be able to charge decent rates for your services, you have to feel confident about your skills and talents. Herein lies the rub for new entrepreneurs, since you are either offering your services on a freelance basis for the first time, or are doing something totally new. This tends to bring up the following anxieties:
- What if I am not very good?
- What if the competitor down the street is better than me?
- Will my client think I am greedy for charging too much?
- Will my client think I am wimpy for charging too little?
- What if I am unable to deliver what I promise and my client outs me as a fraud?
Suggestion: Fortify your self-esteem. However you need to, validate that you are indeed good enough, smart enough and people like you.
- Reflect on good work you have done in the past and use that to anchor thoughts of work in your future.
- Ask trusted colleagues to give you objective feedback about your skills and past business results.
- Repeat affirmations such as “My relationship advice will create harmony in thousands of homes across the world” or “I am meant to help people overcome their shame of poor financial management” or whatever saying rings true for you. Far from just being fodder for comedians like Al Franken with his character Stuart Smalley, affirmations can truly heal a fractured self-image.
- Invest in training and advice for yourself at the same rate you plan on charging clients. This is really important! By doing so, you will feel in your bones what it is like to spend some of your hard-earned cash on professional advice. Usually you see that the person brave enough to charge healthy fees is no smarter or more experienced than you. And this will boost your esteem. If you are not willing to invest in your own growth and development, how can you expect your clients to?
Part Two: Practical Needs
A common error made by new entrepreneurs is not to take into consideration all of the expenses related to working for yourself when setting hourly rates. Most people take their annual salary and divide it into hourly increments. What this approach misses is:
- Your annual salary as an employee is based on working full-time. Unless you have excellent luck and get full-time contract work immediately, chances are you won’t be working full-time your first year as an entrepreneur. Nor may you want to work full-time, as billable consulting hours tend to be much more draining than the “padded hours” you get as a salaried employee. I never worked more than 2/3 time as a consultant, since I had to spend the rest of the time catching up on administration, marketing and relaxing.
- Your salary doesn’t include your benefits like health insurance, retirement investments, vacations and sick time. An extremely crude general estimate for these things in the U.S. is 30% of your salary.
- If you are still an employee, ask your HR department to give you a breakdown of the value of each of your employee benefits.
- Create a spreadsheet to account for all of your expenses as a self-employed person. To get ideas for what to include, FreelanceSwitch created a handy Rates Calculator.
- From this analysis, you will have a number which reflects how much you need to make to fund your current lifestyle.
Part Three: External Market
Knowing what you need to make to cover your living expenses is only part of the equation. You also have to know the competitive range for similar services. Here is where the piece of advice fits in that David was asking about:
Early in my career, I was negotiating the salary for a new position. I asked a very seasoned female mentor for her advice. “What are you thinking of asking for an annual salary?” she said. “All I need is about $50,000 a year,” I replied. She said “The most common mistake I see females make in negotiating salary is just thinking about their basic needs and no more. You must charge what the market will bear, especially on par with your male counterparts. If you don’t, they will lose respect for you.”
I grimaced a little bit and said “I don’t want to become one of those greedy businesspeople who only thinks about money. I don’t just work for the paycheck, I also do it to contribute something meaningful to the world.”
“Here is the key,” she said. “You must charge the market rate or more, but you can give it all away.”
This floored me. I was raised to live modestly and to reduce, reuse and recycle. I had the idea that anyone who made a lot of money was automatically greedy and selfish. Suddenly, I realized that the more money I made, the more I had at my disposal to invest in the community, pursue artistic passions, travel and help others in need. It totally changed how I viewed money.
- Survey your competitors to get a range of fees for similar services.
- Ask a couple of trusted colleagues about their pricing strategy. When I recently had to put together a proposal for a blogging project, I emailed two of the smartest bloggers I knew and asked about their pricing. Hearing both what they charged and what the fees included was extremely helpful.
Part Four: Financial Results
I am saving this for last, but it is by far the most important part of the pricing equation. People don’t pay you for your time or process, they pay you for the results of your work. These results are translated into value, which can be money or time saved or earned, brand value increased or risk reduced. A friend summed it up well:
When clients give you money, guess what? They want it back!
It is your job to identify and quantify metrics. This is not simply to justify your fees, it is also to make sure that what you provide is useful and will have a positive impact on your client. Here is value pricing in action:
I had a friend that did a presentation for 250 sales representatives from a large computer company. He charged $30,000 for two hours of his time. After wondering how he got his client to smoke crack before signing the contract, I asked him how he justified such a fee. “Easy,” he said. “Each rep has a minimum of $300,000 worth of business in their annual sales funnel. I have proven that by using my techniques, you can close a minimum of 10% more deals. So if ONE of the 250 participants does what I tell him, they will recoup their money. If 25% of them do, they will make nearly two million dollars. In reality, I charged too little.”
Can you see how solely relying on your practical financial needs and the norms of the market can skew your pricing model? By focusing on results and value, you will not only be able to charge more, you will do better work because you will be defining and measuring the right things.
- As you are discussing the project with your client, define success metrics. Ask them “How will you know that our work together was effective?” They should say things like “I will get more clients” or “I will deliver better presentations” or “I will improve my credit score” or “I will capture more names on my mailing list from my website visitors.”
- From these broad results, dig deeper and ask “And what would that mean to you in terms of money, time or risk?” You should hear things like “If I deliver more effective presentations, I will get more referrals which will increase my income by X%.” or “If I improve my credit score, I will qualify for a loan which will allow me to start my business and make $5,000/month.” You must dig until you get some tangible metrics.
- To hear a whole lot of tips on value pricing, you can pick up a 90-minute recording and transcript of Robert Middleton interviewing Alan Weiss, author of Million Dollar Consulting. It is $29 and was well worth it from my perspective. If you don’t want to drop the cash, check out some free info on Alan’s site here. He has very strong opinions and may seem a bit strong minded to some of you. (Important update: I originally used the word “crass” here to describe his style and received an email from Alan Weiss pointing out that this was not a fair characterization. He was so right. Had I looked up the word in the dictionary, I would have seen that “crass” means ‘So crude and unrefined as to be lacking in discrimination and sensibility.’ That is NOT what I meant and I am terribly sorry and embarrassed to have chosen that word. What I meant is that he is very strong and to the point, which can be uncomfortable for some people. My apologies Alan, and I learned a good lesson.) My advice with all “gurus” is take the info that applies and discard the rest. (I used an affiliate link for this recommendation since I stand by Robert’s work 100%)
- A former client, Skip Miller, wrote a book called ProActive Selling that has all kinds of good information about the sales process, including value pricing.
Once you have a good baseline for your prices which takes into account these four factors, you can create some standard pricing which will act as a starting point for new contracts.
- Always offer at least two and no more than five pricing options for any client. So as a coach, you can have
- 1 session at $X
- 3 sessions at $Y
- 6 sessions at $Z
It is easier for people to make decisions when they have options. But don’t give too many, or they will get overwhelmed.
- Read Nine Factors to Consider When Determining Your Price from Freelance Switch.
I really welcome your additional suggestions, since I know many of you have a lot more experience in this area than I do. Bring it on!