A topic of tremendous interest which is seldom discussed in open forums is a pretty basic and common question: if you are an independent consultant, how much should you charge for your services?
This is one of those topics that is seldom discussed in the open. There is lots of theory floating around, but when it gets down to it, there are few people who will tell you how it works. This is partly because they don’t want to give away trade secrets, and it’s partly because there really aren’t any hard and fast rules anyway.
I do have a fair amount of experience in negotiating prices as a speaker, a publisher of theatrical productions, and as your friendly neighborhood consultant. What follows is by no means a definitive reference, these are just a few bits and pieces that I’ve found to be useful.
First of all, when selling a consulting service (and by consulting service, I mean you’re going to come in and do something for an organization and not be an employee– you might work for an hour or a week or month), never presume that the person who is purchasing your service has any idea of what they should pay you. In my experience, most of the time, they don’t. It’s not that they’re stupid, it’s just that car mechanics seldom know much about library science, if you catch my drift. For example, it’s amazing how often I came across people who thought the Boston Symphony was made up of volunteer players. If you find ignorance to be insulting, you’re going to feel insulted pretty much all the time. May as well just get used to it.
Most people are experts at one or two things and are clueless about everything else. So if you don’t know how much you should charge, it’s not reasonable to expect someone else to know. If you keep that in mind, you won’t feel insulted or disrespected when they make their first offer. They are not insulting you, they are inviting you to educate them. Here we go.
One common mistake is to think in terms of “the value of your time.” While some kinds of jobs you do will inevitably be based and billed on the amount of hours you spend doing them, and the company you are working for may have a preset system for calculating and pricing the hours, the real trick is to get away from that factory / commodity concept and charge for the value of your work. For example: if talking to you for 10 minutes on Monday will give me a piece of information that will allow me to make $100,000 on Tuesday, that 10 minutes of your time is easily worth $25,000. Again, it’s not the time, it’s the value.
If you’re working as a “temp,” and thinking in terms of your “day rate,” well, if you’re doing something that some people do full-time, bear in mind that you should not charge a simple pro-rated amount that equals what a full-time employee gets in their paycheck for working on Thursday. At the very least, you have to add in something like an additional 70% to cover your own FICA contribution, health benefits, pension, vacation, etc. plus, never forget the tremendous convenience you are offering to someone for not having to “employ” you.
The process of hiring someone full-time requires a considerable amount of company time and expense in training and paperwork, not to mention the legal and financial liability in case that employee doesn’t work out for whatever reason. Part of the “value” that you are offering as a consultant is that you can be easily fired, also that you can be paid in 30+ days as opposed to right now. That has value, and you should be aware of that– and if necessary, you should tactfully remind the client of that– as you proceed with the negotiation.
In addition, if you are working off site in your home, hey, that’s heat, light, a desk, a phone line, and a computer they don’t have to pay for either, hence, added value. They are getting the use of those utilities and equipment, so they should pay for them. And remember, along with the cost of the electricity, you are also spending time paying the bill, hence whenever you are “passing through” an expense you should mark it up by a percentage. No rules– it can be anywhere from 10 to 100%.
To someone who has worked a 9 to 5 job all their life, it may seem outrageous that someone would expect to come in for a couple of hours and walk away with a check for $20,000, but that’s because they don’t see the whole picture, and again, they need to be educated. For example, take the world of professional speaking. It looks like the guy (or gal, please excuse my ongoing gender simplification) came in, talked for 60 minutes, and left with a check for $20,000. But if you parse it out, well, that speaker probably had to spend an additional two days traveling. They had to pay for an assistant or at least a webmaster, plus all of their home-office expenses, all of their ongoing promotional and printing expenses, not to mention the hours or days they spent researching the audience and prepping for the event. There’s also the legal fees of doing the contract, and if they worked through a bureau, that bureau may have taken 25% for their trouble. In other words, that $20k for “one hour on the stage” is probably the culmination of 3-4 people working full time for a month. In the context of all that, suddenly it seems amazing that $20k was all it cost.
Of course, the above approach is all just generic time-based expenses. Let's consider "unique value." One book on professional speaking explains it this way: if there are 2,000 people in an audience, and the event owner is responsible for delivering a worthwhile hour of entertainment to that audience, well, if that same 2,000 people went to the local movie theater, they will all have to pay at least $10 each to sit through a standard movie. If that speaker is providing an equivalent or better entertainment value, then it’s worth one hour of basic movie-going, is it not? Again, it’s about value, not about the time. And bear in mind, if a company is taking 2,000 employees “off the line” and is essentially paying everyone in the room their salary/ hourly rate while you sit there and talk, it seems only right that the speaking fee should balance with that. If they are already paying $100,000 or more to have the audience sit there, surely the speaker is worth an additional 20%, if they’re worth anything at all.
One sales phrase I learned a long time ago was “keep adding value.” When discussing a fee, customers of course will tend to want to spend less. You can counter this by explaining what they are getting for their money. They will be more accepting of paying more money when they learn they are not “getting screwed” and in fact are getting a fair amount of services in return for the money. This is sales 101.
Another element to consider is “nondollar” value. If doing a job for cheap or for free gives you an introduction or connection to a potential high-paying customer, well, that has value to you in lieu of cash. Would I appear on the “The Colbert Report” for free? What a question. Of course, beware of the “it’s great exposure” gambit many clients will use. Unless there is a specific guarantee of future work, or there is obvious promotional value to you (like being on a major media outlet), caveat emptor. However, if the crowd is large enough, if you have a book or a DVD for sale, you can make more money from these “back of room”sales than you will from the fee, so that sales opportunity is another form of non-dollar value. (If you have a book selling for $15, and 20% of a crowd of 2,000 people buy it, that’s $6,000 in gross sales. Not bad.)
Do be careful of giving people a range of prices. If someone asks you, “what is your fee?” And you say, “well, it’s anywhere from $3, 000 to $10,000 depending,” all they will hear is $3, 000, and that is the dollar amount they will submit in their proposal to the board, and that is what they will offer you, and they will feel “baited and switched” if you ask for more. It’s always easier to lower your fee than to raise it. If you find yourself being forced to come up with a number quickly, always go high to start, you can always come down later. One mentor of mine says, "think of a number that would make you happy, then double it."
Of course, that brings us to another issue. The problem with high fee quotes is that some (or should I say most?) potential clients will have no concept of negotiating or haggling. If someone asks about your fee, and you say, “it’s $10,000,” they may walk away sadly thinking, “gosh darn it, all I have is $9,000, I guess I can’t afford him.” You may very well have been willing to take an offer of $5,000, but it’s all gone now. When people ask you how much you charge, instead of coming back with a quick immoveable dollar amount, you might want to start a lengthier dialogue with them. Get them used to talking to you about their issues and their limitations. Condition them to the idea that you are willing to listen to their problems and concerns before you start mentioning numbers. Keep adding value and sympathy. The number should be a secondary concern anyway. DEVELOP THE RELATIONSHIP. Relationship, mutual respect, and quality come first. Remember, as they chat, while they thought they needed you for just one day, you may discover that they need you for a week. Never assume that people know exactly what they need from you. They don’t.
Always take a moment to educate yourself about your nearest competition and what they are charging. Be mindful of the effect of perceived and relative value. You may fall into the common beginner’s technique of marketing yourself by being the cheapest alternative. One of my primary mentors once taught me, “you don’t want to perceived as the cheapest guy.” People equate price with quality. It’s also helpful to know the price of the most expensive guy, as that relatively higher price will make your fee seem more reasonable. At a certain level, this is a poker game, and no one knows what cards the other player is holding.
People will often push you to make a flat rate price up front because they need to get a sense of control. To counter that, go to the root cause: get rid of their need to have control, and make them understand that you are there to help them in ways they never imagined, and you are worth twice what you are charging them in any case.
When it gets down to brass tacks, and I discuss actual fees with potential customers, I have one basic rule I took from the Rotary Club. They have something called the “four-way test,” and one of the questions is, “is it fair for all concerned?” For example, when someone wants to rent one of my orchestral kid shows, they always assume that I rent them the way the local drugstore puts a price on the kleenex. Before giving them a price, I always say, “Well, before I quote you a price, I need to know more about you and your event. What is the overall budget? Is the orchestra professional or amateur? How many people are expected in the audience? Is there an admission fee, and if so, how much is it?” Once I know that, I can offer a price that is fair for all concerned. (The people who rent Broadway shows to high school drama departments use a similar “take of the gate”/ percentage of overall budget approach.) It doesn’t make sense to charge the East Eaglejaw Symphony the same fee as the New York Philharmonic, as they are deriving different levels of value from my work. Again., it’s not a generic commodity price, it’s based on the value to that buyer.
But just remember, if you are working purely on commission, i.e., taking a percentage of the gate, you are taking a risk, and if you bring in a full house, you should get more reward for that. That is only fair.
When you are an independent consultant, a big part of your job is educating customers about what your value is. Very often, it’s not an issue of us versus them, it’s an issue of us versus ignorance. Many times, people just don’t know what to pay you. And many times, that person has to turn around and go to a Board of Directors and sell you to them, and explain to them why they have to pay what you are charging. The more they understand about this stuff, the more of an advocate they can be for you.
Finally, along with the “is it fair for all concerned” question, one element I look for in a good negotiation is achieving mutual respect.
It is very common for people to begin a negotiation by telling you how broke they are. I understand that. However, there is a baseline of simple respect that you should expect from a customer. No matter how noble their ultimate purpose, it is their responsibility as a fellow human being to do what needs to be done to provide proper compensation to you for your time and expertise. I don’t mind people asking if I will do something for free, hey, no harm in asking. They have their job to do, and part of their job may be getting stuff for free if it’s free. But it is also their job to scare up the cash necessary to properly compensate you and everyone else for their services. Budgets are always tight– since the dawn of man, they have never been loose.
Another part of this process is just believing that you are worth it. If you were a a “rich kid,” you may have been taught good “self entitlement” skills, but otherwise probably not. There are lots of people who have no idea of what things are worth, especially themselves. Well, try to look at things objectively. If you are offering unique value, then you are not doing anything wrong by charging for it.
Also bear in mind, no one has the same value to everyone. Just to illustrate, my mother was a junk dealer (she called it “collectibles”), and she used to price these old beat-up used postcards at five dollars apiece. The other junk dealers sold their old postcards for a quarter apiece, and they laughed at her. But as she pointed out to me, “if someone finds a postcard with their grandmother’s house on it, price is no object. And if they don’t want it, even if it’s only a quarter, they still won’t buy it. Price is not the issue.” If you think of yourself as a commodity, then you will think you have the have the same value to everyone, and that universal value would be pretty low. You aren’t valuable to everyone – even the Beatles were not universally adored. But you should get paid by the people who do derive value from your services.
Next, a tough rule to learn: Be prepared to say “no.” While we all want to work as much as possible, if you can’t say no, then your value is no longer under your control; you are willing to work for what other people decide they feel like paying you. You fee level is part of your brand. You can do deals, but remember, people talk, and if they know you sold yourself for half price to someone they they across town, it’s doubtful they will be willing to pay you your full fee. Also there will be some job offers you should just say “no” to because you will hate yourself for taking them. Believe me, you’re not doing that person a favor by taking a job you will resent for the low pay the whole time you’re there. Or it could be the money is fine but the job just isn’t right for you. Say no. As Shakespeare said, “there is no profit where no pleasure is taken.”
Negotiating your fee is not the tail end of the sales process, it is an integral part of the entire sales and delivery process. And when I say sales process, I don’t mean just getting somebody to give you money. The sales process is a process of learning what your customer needs and what they are about generally, also about educating them about the value you offer. When someone asks me, “Justin, what is your speaking fee?”, they don’t realize that what they’re really saying is, “Justin, let me tell you all about myself and my organization,” because that is where the conversation has to go.
I realize that one of the many unfortunate effects of standard school training is the belief that everything is written down someplace and there’s an easy answer to this question. There isn’t. Also, going to school will very often lead you to believe that you are a generic commodity. You aren’t, and, I hope this discussion has shed some light on the subject on how to see you from someone else’s perspective and how to better derive fair value from your unique abilities.
© Justin Locke
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