Many of my friends started, or are starting, consulting and freelance businesses. I have helped several of them start their business using my own background in consulting to guide them as they sell their services and time to prospective clients.
Eventually, though we come to setting a price for their time and services, and the question comes up, “How do I know what to charge?”
Whether you are a photographer, a computer consultant, a web designer or a social media strategist, there will come a time in your business where you will have to name a price for your services. It’s a nervous moment. Name a price too high, and your prospect will walk to one of you many competitors. Yet, name a price too low, and you may resent the work or worse, not be able to put enough time into the project to do a great job.
There are also several ways to answer this question, including the mechanical answers. It’s easy to find different ideas and approaches for the actual process of setting consulting rates on the web (and photographers can find more resources on what to charge here), but I want to talk about the process I used that increased my consulting fees by over 700% in five years when I was consulting full time.
I have owned many books on consulting, but none of them have helped me as much as Gerald Weinberg’s The Secrets of Consulting. I can’t say enough good things about the book, but I credit the wisdom in this book for a great deal of my success. Many of the rules and laws that Jerry teaches through story and parable have been told to my clients as well to help them understand one issue or another. In fact, the last time I reread the book, I found that one piece of advice I had been attributing to ancient Chinese wisdom over the years was also from this book – it’s that timeless. Every time I read it, I learn more.
Other books I owned gave those same mechanical methods I quoted above, but in this book, I found a different way of looking at pricing. I have used these laws of pricing to tremendous success, and have guided my friends getting started in consulting on how to use them as well and watched them become successful. So, because so many others I know are starting out right now, whether from the economy or because of their passion, I will share this small taste of the wisdom in that book.
Pricing has many functions, only one of which is the exchange of money. My sister once became the principal of a struggling private school. In spite of lowering the cost of admission and the entrance requirements, the school had not been able to increase its registration. My sister raised the admission fees (the money part of the price) and raised the entrance requirements (another form of price as you will soon see) and the school flourished. There’s more to this than just money crossing a desk.
The more they pay you, the more they love you. The less they pay you, the less they respect you. Once upon a time, I was a beginning consultant working for an Oil and Gas company on a project with another consultant hired by another member of management. In one notable situation, they asked our advice on a situation, and we both offered conflicting advice. The other consultant billed out at a rate more than three times what I was charging at the time, so his advice was followed – all the way to disaster. The more I raised my rates, the more my clients followed my advice and benefitted.
The money is usually the smallest part of the price. This law is a critical one to understand. I mentioned before that tougher school admission requirements were part of the price, and this law explains it. I helped a friend with a proposal recently. We wrote up a cost that was reasonable, but not likely to survive the cut-throat market that their business is in. So we then set a monetary price that was competitive (but not the lowest to honor the second law) and gave credit to secure rights to use the finished work in a commercial portfolio and the requirement of a letter describing the service provided – what we hoped would be a letter of recommendation. My friend got the job, and a glowing letter of recommendation and a valuable item for their portfolio.
Pricing is not a zero-sum game. I know a consultant using this law as I write this late at night. He is working on state-of-the-art computer networking gear in which he knows the experience is in very high demand by other clients and gaining experience. These late night hours will not be billed to the client because tonight’s payment is in the form of experience and education, and the client will get better management of their systems because of the work he is doing. Both parties gain something of greater value than what they are contributing. Both have positive values at the end of this engagement.
If you need the money, don’t take the job. For me, when I have really needed the money, I would over commit to justify a greater fee than I would normally propose, and then struggle to deliver. You’ve heard the advice to under commit and over deliver? Taking a gig when desperate for the cash causes pressure to do just the opposite of what is wise. So start before you really need it, or find something else to get past the point of desperation – for the sake of both your client and yourself.
If they don’t like your work, don’t take their money. If you thought that last law was difficult, here is another one that is equally difficult to follow. But it does work. Really. I thought it was an open invitation to have a client take advantage of me and my services, but it says something to a client when your interest in their satisfaction is greater than your interest in the money. It brings out the best in them when it is genuine. I only have one reputation, and it’s really worth more to me than whatever a client may be forced to pay me.
Money is more than pricing. The third law of pricing shows us that pricing is more than money, and the converse is true as well. Money is more than used for paying for the final product. For example, down payments on a project create commitment by the client, and a willingness to commit resources and accomplish prerequisites for projects. It doesn’t take much for a client to verbally approve a date for a project to start, but to provide a purchase order number, or pay the “due upon signing” portion of a contract – then the commitment is much stronger which means according to the second law that they will love you more (because paying something up front – not anything extra, just a small portion – is also part of the price).
Price is not a thing, it’s a negotiated relationship. In the Cluetrain Manifesto, we learn that markets are conversations. This, then, is a corollary to that principle, because as markets are conversations, so too prices are relationships. It is a structured relationship. It is a negotiated relationship. And negotiation takes conversation, listening, and understanding between you and your client.
Set the price so you won’t regret it either way. Here it is, permission and encouragement to charge more to do the jobs you don’t want to do, as well as charge less to do the work you really want to do. In fact, it’s a law. I once worked on an emergency situation for a company on the weekend on my young son’s birthday. I first attended my son’s party (for there was no amount great enough to be paid that would have caused me to not regret missing it), and then I charged three thousand dollars an hour (with a four-hour minimum) if they still wanted me to help them. I would not have regretted it in the least if they had turned me down, but they were losing hundreds of thousands an hour at the time so they accepted. And in turn, I didn’t regret working that situation as it allowed me to take several days off that week to spend more time with my kids. This is how it is supposed to work – not one hourly rate for the work you love and the work you hate.
All prices are ultimately based on feelings, both yours and theirs. In my example of the ninth law, it’s been an issue of debate with my fellow consultants whether the same hourly rate should be quoted for every project, or used as a basis for a flat-rate projects as well. It certainly is reasonable. Standardized pricing is more scalable than pricing based on the principle of least regret – especially when you have a team of consultants. It’s reasonable that a consultant that does what he said he would do should get paid, regardless of how the customer may feel about the work.
But that’s the thing, feelings are not always reasonable. But they are always being felt, and they often guide decisions. This is where Jerry’s smarter than I am. He talks about how these laws guide one through the feelings of pricing. I would just have said how irrational they are.
But having tried them – they work. These laws of pricing, by the way, are only one small part of what is in that book. And if you are getting started freelancing or consulting and need to know how to price your work, consider these rules. Then go buy that book. Really it’s that good.