If you’re new to consulting/strategy services, I’ll share a secret. There’s a formula for pricing services as a small business or freelancer. It’s easier than it may seem. Use hourly bill rates even though you generally shouldn’t bill hourly.
– Take the annual cost of each billable person. Salary, benefits, bonuses, etc. What you have to pay them, and yourself, for fairness and engagement. (X1, X2, X3,…Xn)
– Add 20% for overhead and margin (depends on your business)
– Assume that you can reach 1,200 billable hours per person. Yes, it’s low. But they are also doing admin work, marketing, and sales, learning, and innovation. You can drive harder but probably don’t want to let it slacken below that.
– So, hourly rate per person is (X1*1.2)/1200. Let’s say that’s Y1, Y2, Y3…Yn)
– Now the hard part…how long do things take? You can estimate duration per person based on effort and experience. You’ll get better at this the more experience you have. You can also back into it by starting with a rough weekly/monthly rate. There’s an escape hatch, too. If you understand your assumptions, build them explicitly into your scope of service.
– Let’s say it will take two people 20 hours a week for 6 weeks. Now it gets easy again. (Y1 + Y2) * 20 * 6 = T (undiscounted total fixed cost). It’s even easy when different people have different numbers of hours.
– Finally, what do you quote the client? Well, typically, the more hours, the more discount. But you also need a floor number. Longer projects improve utilization for you and predictability for both parties, so you can afford to bring down the price. Just don’t do it past the point where the discount exceeds the opportunity cost (value or revenue-generating activity outside of billable hours). So, it’s T minus some percentage range.
– When you have a fixed monthly retainer, you can use the same math to define hours of service. You already know the value of T. A month has 4.2 weeks. Just calculate the number of hours, H (H is 20 in my project-based example above), based on hourly rates at 4.2 weeks. Same discounting logic applies. Longer retainers leave more room for discounting.
– There are other models, too. Depends on the nature of the relationship and need. You can try pre-retainer pilots. You can try hourly billing with a cap. See what it takes to get to know and trust each other.
– Finally, you can create bundles of services/deliverables so that your pricing math is repeatable. There will be variations in the bottom line per client, but any irregularities should smooth themselves out across multiple clients.
Questions? Ask in the comments or reach out. I’ll be happy to help!
PS: Bonus answer. Do you share your math with clients? I do if asked, although questions are extremely rare. If they ask me for transparency on my pricing, I gladly explain. I’m also very clear during negotiation—what can be price and what has to be scope.
