Keeping on top of bills is an essential part of your day to day life as a consultant. Billing can eat into almost 20% of your working week and have a big impact on your profit margins. So shouldn’t you get a grip on your invoices?
I am sure you document the time you have networked, met, and worked on a client’s project, and are trying to keep on top of any due payments. But since billing is so confusing, with there being so many different ways to charge and bill a client, we wanted to show you what the market is doing and what is best for you.
We will be asking; what fee structure should I use, how much should I bill, and how do I collect payments?
Follow these points to make your billing process more competitive and simple:
- Package rate vs. hourly rate
- Desired Income
- To automate or not to automate
Package vs. Hourly
When starting in consultancy, the answer is always to charge hourly, as you don’t necessarily have the market knowledge to set package fees accurately.
Around 60% of all jobs are charged hourly, so most people are familiar with this style of payment.
The benefit of starting out using an hourly fee structure is that you will see a clear upward trajectory in your revenue as you naturally learn how to work more efficiently. You quickly require fewer hours per client. But for more experienced consultants, your income stream might start to plateau on an hourly basis due to the physical number of hours you have in the day.
For a wider picture, most consultants use a package rate (~31%). Around 24% of consultants bill by the hour and approximately 22% use some form of monthly or daily retainer.
So you should always weigh up the positives and negatives of your pricing structure before reaching a decision.
By charging an hourly figure, you can average out your costs between all your clients, so there is no need to stress should you spend slightly too long on one client. You can set different hourly rates, depending on the type of sessions. However, if you do not keep on top of your hours, the paperwork, if left unautomated, can easily run away with your time. The average hourly starting rate for a consultant (e.g. management consultant) is ~$110 per hour; this gives you a good benchmark to start your journey as a consultant.
- 60% of people already pay by the hour
- You receive a constant cash flow
- It averages out your costs
- The standard for new consultants
- Easy for new consultants to calculate
- Income from hourly rates can plateau further down the line
- It can be challenging to keep track of the hours
- More price comparable, meaning you can easily be priced out of the market
With package rates, you must factor in costs at the start. However, you might face a client that you have little to no experience in dealing with, so make sure you look for similar projects offered by competitors and keep track of the prices they are setting (more about this later).
Another downside is that a package rate is relatively inflexible. Should the costs of a client creep up, meaning you lose revenue, there is little you can do to amend the package rate. Sometimes, you can create a payment plan if things take longer than expected, this will allow you to charge the client more should the prices rise. But be cautious, any price increase should be clearly communicated to prevent any bad interactions with clients. There is a lot of useful information on price increases in our blog.
However, try not to be reactionary. Often when working for a client, it will take you considerably less time to complete the work than you had anticipated, giving you a better return. From the client’s perspective, a package rate can be a popular option, especially for industries with tight profit margins, like the marketing and product development sectors, as it gives them a clear and transparent price to work with.
- The most popular form of payment for Consultants (~31% of the market)
- Enables you to charge more than the hourly rate
- Simplistic for both you and the client to keep tabs on
- Sectors with tight profit margins prefer a set rate
- Through experience, you will be able to set prices more accurately
- Less price comparable, meaning you are less likely to be priced out of the market
- Sometimes it can take just as long to keep track of all the cost information in order to set your next package rate
- You have to set the price before you have even fully gained a full grasp of the situation
- You can sometimes lose money should you underestimate the time and resources required
What you charge is dependent on where you live, your experience level, and the specific sector you are in. We recommend you try using Payscale as it can give you tailored information about the standard salary for your position within the market. And once you have worked out this salary and adjusted it to your own needs, you can use our handy calculator below.
How to calculate your hourly rate:
Start with your desired annual wage. For simple math, let’s assume you want to put $120,000 in your bank account each year.
Since you are self-employed, you will need to factor in taxes, health insurance, and business expenses. This is one of the biggest things that is underestimated as a new consultant, so it is always better to overestimate. For that, let’s add $60,000 for a total desired annual income of $180,000 (However, the average starting salary for a consultant would be about ~$90,000 in New York).
Let’s assume that you book 50% of your working week time on paid consultations each week. Say you are only working 47 of the 52 weeks, and you are booking half of your time each week.
Twenty hours a week for 47 weeks = 940 paid hours of work. If you want to earn $180,000 annually, you would need to charge $191.49 per hour for your time.
So, internally, you know you need a baseline charge of ~$200 per hour to hit your goals.
Just to give you an idea, a financial consultant, for example, earns around $150 per hour in the USA.
If you are going to be charging using a package rate, you need to ensure that you factor in how many hours of meetings you plan to have with the client and how long it will take. A simple way of calculating your package rate would be working out your baseline charge and multiplying it by how many hours you think will be spent on each client.
To automate or not to automate:
This question has one clear answer, automate. No consultant nor client has time to waste organizing and keeping on top of their bills.
On average, the admin associated with non-automated billing takes up to 20% of your working week, and it then normally takes 30 days for customers to even pay.
It is an inefficient and inconvenient use of time to send and chase for bills manually. It devalues the service you have given to your clients, and it leaves you looking as though you are behind the trend if you do not streamline your service by automating the billing process. So by choosing a service like MeetFox, you can simplify the payment process and improve the client journey.
30% of the market has already automated.
As a consultant, how you bill clients is dependent on your experience level. If you are new to the game, charging by the hour is the way to go. However, as you become a more experienced consultant, there are a lot of financial merits to a package system; with this being the industry’s favorite way to charge.
When working out how much to charge, you need to compare the market rates and ask the community on forums. Once you have got a grasp of this, you can simply use our handy equation to work out your desired hourly income. One certainty you can take away from this article is that it is always cheaper and easier to automate the billing process. By doing this it will place you in a position where it looks as though you are ahead of any consulting trends.