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How Much Should You Charge As An Independent Consultant?

Written by: James Chan

Article Overview: James Chan shares one lesson on pricing.

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How Much Should You Charge As An Independent Consultant?

"How much should I charge?"

This is a question that all spare room tycoons will ask till the day they die. If you feel lost, you're not alone. Huge training industries have grown up just to help people learn how to price -- from huge multinationals to people like us.

But this is no cause for concern. Part of pricing is a science. The rest is confidence in action. You must begin with a solid estimate of all your business costs, and a well-founded idea of how much you need to support yourself. While there are wide variations in pricing practices from industry to industry, it will be worth your time to research your field and see what competitors are charging.

Because we usually have lower fixed expenses, spare room tycoons can often prosper at a lower price point than our larger competitors. Often, though, we offer benefits that nobody else can provide, and we should be sure to point this out to potential customers, and to charge for the added value we provide.

There is, however, one iron rule of pricing: You must charge enough to live.

When I started my business, I bought a book that offered a formula. It said that you should set your hourly rate at a level that would give you a reasonable living if you are able to sell about one third of your available hours. Another third of your time should be allocated to finding new business. The last third is taken up with such activities as bookkeeping, walking to the post office, gnashing your teeth and checking your email. I found this very useful advice because I was able to make it work. It helped me keep in mind how much time I need to spend promoting.

There are other formulas that apply to retailing, manufacturing or other sorts of services, and most of them are helpful both because they stress how much of an entrepreneur's time is spent doing apparently nonproductive work, and because they offer a discipline that many who are new to business sorely need.

None of these formulas work, however, if you don't offer what buyers want at the rates you need to charge to stay in business. All too often, beginners think that they can undercharge in order to get business. This seems like a logical tactic, but it's the road to ruin. It costs money and may make it difficult to sustain your business. It can lead some customers to wonder whether you really know what you're doing. And it can distract you from the more difficult, but perhaps more rewarding, task of finding something you can offer at a price that gives you a good income.

Nevertheless, just about every self-employed person I know has adopted this tactic at least once. I did it during the late 1980s when things were looking particularly gloomy in China. I decided to offer a one-day seminar for a very low price, essentially in the hope of getting my foot in the door. All I need, I told myself, is to find one big company that's interested.

I spent thousands of dollars on printing, postage and mailing list rentals. The phone rang only a few times, and I sold just one seminar. I was encouraged, however, because this company was a world leader in a technology that China desperately needed. And it was relatively nearby, which usually helps.

After the seminar, there was even a small follow-up consulting assignment. I didn't dare charge very much for it because I didn't wnat to scare a potentially lucrative client away. Later I found out that, in the two years after my seminar, the company made more than $1 million in sales in China. Yet I had charged only a few thousand dollars, merely enough to pay for my mailing campaign. That meant that I had done several months of work, and offered valuable counsel, without making any money at all. I had not respected the value of what I was offering to this company. How could I expect the client to do so?

Soon after, this company was sold, and it did not, in the end, become a long-term customer. But if it had, I might have had difficulty raising my rates. You need to establish your price from the very beginning, or you will always be at a disadvantage.

If you charge too little, you could find yourself working full-time for less than it costs you to survive. Then, if you lose even a little piece of business, the results can be disastrous. Soon you'll be looking at the want ads seeking to serve the corporate kingdoms once more. The samurai is killed by his own cheap sword.

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Article Tags: added value, bookkeeping, business costs, confidence, discipline, email, entrepreneur, hourly rate, iron rule, multinationals, new business, post office, science, sorts, spare room, teeth, tycoons, variations

About the Author: James Chan
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James Chan, Ph.D., is president of Asia Marketing and Management (AMM), a Philadelphia-based consultancy specialized in advising U.S. firms on exporting American-made products and services to China and forging business relationships there. Since he founded his practice in 1983, James Chan has advised more than 100 U.S. companies in expanding their businesses in Asia. To view his background online, go to AsiaMarketingManagement.com. He is author of the book, Spare Room Tycoon at SpareRoomTycoon.com. Dr. Chan is the expert interviewed by three financial managers in the 60-minute DVD titled "Secrets of Business Success in China." The 60-minute DVD is a teaching tool for business schools and international executives. It is available on Amazon.com here.

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