Tag Archives | value-based pricing

Want to know the fastest way to earn less than an entry-level consultant in a medium to large consulting firm?

Start your own consulting business and charge by the hour.

According to a recent study by Kennedy Information, Inc., the average salary offered to consultants from top business schools will hit $109,000 this year, and that will be accompanied by five-figure signing bonuses and annual bonuses ranging from $5,000 to $30,000. The total, first year compensation package for a newly-minted consultant could reach over $150,000.

An independent practitioner charging an hourly rate would have to work awfully hard to match that newbie’s salary.

Not to be tedious, but do the math: There are 261 days in a year–once you subtract the weekends. If you take a month off for vacations, holidays, and the like, you’re starting from a base of 230 billable days, give or take a few.

Research shows that firm owners will burn about 110 days a year on non-billable activities like marketing, administration, education and traveling, leaving about 120 days of billable time.

Assuming you’re able to bill for 70% of those 120 days at $2,000 a day, and your overhead is a measly 20% of revenue, your annual, pre-tax earnings would be roughly $135,000. Not a bad day’s pay, but you’re carrying all of the business risk, and making less than an inexperienced consultant.

Most books on the subject of starting a consulting business take you through a detailed exercise on establishing your billing rate. Unless you’re running a large practice with many consultants, ignore this advice.

Instead, free your practice from the tyranny and limitations of the billable hour: base your pricing on value delivered, not hours worked. Once you’ve broken the rate-per-hour syndrome, you’ll get paid what you’re worth.

Some consultants argue that it’s too difficult to quantify the value of a consulting project in advance. But every project has potential, measurable benefits. To orient clients in the discussion of value, consider the drivers of consulting value in my previous post.