How Should I Set My Prices?

By Herman Holtz and Peter Meyer, for The Independent

Preparing for your workshop at the annual conference, we got this question from a member. Here is something to consider between now and October.

"How Should I Set My Prices?"

Look at this in terms of three methods. Many consultants follow a path that goes through these as successive stages. As you go further in the business, you move on to the next stage. This is not good or bad, it is simply a pattern that we have seen.

The highest incomes come from the third method.

Method One: Setting rates based on your costs.

This is the simplest method. To get an hourly rate you look at your own annual costs or desired pay and multiply that by two, three, or four. Then you divide the number by 1,000 and you have an hourly rate. If your costs are $25,000, and you use the factor of three, your total income would be $75,000. Divide that by 1,000 and your hourly rate is $75.

Why 1,000? Remember that there are only 2,080 hours in a year of 40 hour weeks. Of that, you may only bill for 1,000 hours per year and may dedicate an additional 1,500 to your own education, to marketing, and to benefits.

The upside is simplicity. The negatives are that it ignores what is best for the customer and where you stand in the market. Many consultants who use this method wind up with lower paying clients. For some, this can be less fun than clients who are not so concerned with money.

Method Two: Setting rates based on your competition.

To use this more complicated method, you look at your own rates in relation to the consultants who directly compete with you. When you do this, you can start with the service you provide, but be specific, COBOL programmers may not bill at the same rate as Oracle developers. Then, look at the geography (New York may have higher rates than Kansas City.) Then, look at your level of background (sometimes but not always, more experience equals higher rates.) If you do not have a feel for these numbers, look in the CompuServe Consult Library (sponsored by ICCA) and find Janet Ruhl's survey results. These will show rates as she collected them in January.

Finally, look at your view of your value compared with others. Do you do an average job or a better than average job? Set your fees accordingly. If you are not sure, you may want to look at method three.

The upside of this method is that it increases both your fees and the level of the client with whom you work. However, you may feel that you are letting your competition run your business. If you use a USP (Unique Service Position) and your clients see you as different from other consultants, then you will have a harder time with this method. In your last IT we suggested that it is to your advantage to be seen as different, so you may want to look at the third method.

For more detail on these first two methods, please see Herman's book How to Succeed as an Independent Consultant.

Method Three: Setting rates based on your client.

Where the first two methods focus on setting rates based on your own issues and perspectives, this process focuses on setting rates based on your client's viewpoints. Here, you and your client look closely at the work and at the results you expect. With that you build a plan to deliver those results and you agree on a fair price. By this we mean equally fair to both of you.

This does not mean that you should be charging different fees for the same work. As you follow this process, you will find that almost every assignment is different from any other, and that you are comfortably pricing by job instead of by hour or day. Even if the two jobs seem similar on the surface, they will need different levels of effort and skill to get the results. That can result in two different prices for two different clients, and both are fair.

If you would like a systemized process for this, we will be presenting a proven one at the ICCA Conference in St. Louis. We can also send you an abridged version. Drop us a note at This email address is being protected from spambots. You need JavaScript enabled to view it. or leave a message in the ICCA area of the Consult Forum. Or call Peter at 408/439-9607.

If you have been wanting to move from hourly to project pricing but are worried about how to accurately price projects, look at this process. Then come to the conference.

The process has two interesting effects. One is that it can raise fees for you. The other is that it increases satisfaction for your clients. Combined, that can result in more fun in your practice. It has two risks. One is that it is more complicated than simply quoting an hourly rate. The other is that you will invest more time in getting to the fair price.

Which of these three methods you chose is an individual decision, based on what you want to do and get. You may use one on a small assignment, another on a large contract. If you ask our recommendation, we will always suggest that you focus on your client and follow the process in method three. It is better for you and better for your client. See you in St. Louis!

3Com Corporation is proud to make Herman and Peter available to you at ICCA's 20th anniversary conference.