You’re leaving money on the table and short-changing yourself and your client
When consultants or coaches base their price on the hour, they are doing themselves and the client a disservice.
It is common practice for coaches, consultants, freelancers, or experts to charge per-hour to solve the problems of the clients. We got to this model as a way to simplify and compare apples-to-apples. We all understand time and we all understand money.
But, there are a few problems with experts charging by the hour. Not only does the hourly-rate gig limit your income potential, it also actively devalues your knowledge and expertise.
In other words: the more skilled you get, the less you earn.
For example, let’s say the consultant charges $100 per hour to solve a problem. Over the course of their career, they become more efficient at diagnosing the problem and exposed to more ways of solving the problem. Moreover, the tools in their toolbox become more plentiful and they become more skilled at using them. Efficiency goes up.
That’s good, right?
Now, as their efficiency continues to improve, instead of taking one hour to solve the problem, they can do it in 30 minutes. Thus, they charge the client half of their hourly rate: $50.
See the first problem?
In reality, the 30-minute client is getting far better advice in terms of experience, tools, and solutions, but only paying half of what an early client paid.
This creates a conundrum. The consultant wants to maintain their income levels (rightfully so), but is limited on ethical options to do so.
At a point, the desires of the consultant and the desires of the client become competing interests. And nothing good will come of this type of relationship.
For example, the consultant is now incentivized to artificially delay providing a solution (say, to use a whole hour when she has the solution in 10 minutes), to maintain her income levels. Meanwhile, the later customer isn’t properly paying for the value he is receiving.
A real life example:
A consultant met with a client. After approximately one hour, the consultant had identified nearly $70,000 in wasted spending per year. This spending was in actual dollars-out-the-door, not just wasted time (time is money, but they did not address these inefficiencies).
At the end of one hour, because of the experience and advise of the consultant, the client’s business realized a savings of $70,000 per year.
Conservatively assuming the client would have maintained those expenses for 2-3 years, this is a savings of $140,000 – $210,000.
What is the value of that consultant’s time?
For the client, the actual value is $70,000 per year.
But if the consultant told the client that she charges $70,000 per hour, she would be laughed out of the room. Even at $50,000 per hour, the client would have come out $20,000 ahead in the first year alone.
Coaches and consultants need to base their fees on the value they deliver. Internally, you can decide what you are worth to yourself.
Here is a simple equation for calculating what you must earn per hour (not what you should charge the client).
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 for taxes, health insurance, and business expenses. For that, let’s add $60,000 for a total desired annual income of $180,000.
Simple math says that is $15,000 per month, for 12 months of the year. OR – about $86 per hour (2080 hours per year).
BUT – you are presumably not working 52 straight weeks of 40-paid hours.
Let’s assume that you only book 50% of your time on paid consultations each week.
Let’s also assume you want to take 2 weeks of vacation and not work on holidays. Or the day before and after them.
Now, you are only working 47 of 52 weeks. And you are only booking half of your time each week (this isn’t bad, it just needs to be factored).
Twenty hours a week for 47 weeks = 940 hours of paid 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 to charge ~$200 per hour to hit your income goals. Do you provide more than $200 worth of value per hour?
For the consultant in the first example, the answer is yes. She delivered $70,000 in value in the first hour. (It would be silly to assume that she could find another $70,000 in savings if she sat there for another hour, so don’t set your rate at $70,000 per hour. 🙂
How do you get clients to value your time at >$200 per hour? It takes a little coaching.
Often, clients do not have a reasonable understanding of the value of the problem they are asking you to solve. So you have to help them solve for it.
For example: a client who has a leaky product onboarding process calls you and explains they are losing 20% of their converted clients per month. You may be required to help them do the math.
How many customers are you currently acquiring per month?
How many customers are you currently losing per month?
How much is a paying customer worth over the lifetime of their membership (often called “Lifetime Value”)
Again, for simplicity sake, let’s assume the client is acquiring 100 customers per month. They lose about 20 customers from various leaks in the system. Each customer’s lifetime value is $1200 ($20 per month for 5 years).
As it stands, the client is losing $24,000 of future revenue with their current process. This problem compounds because each month this increases by another $24,000.
(This math is very simplified and does not factor for … well, any compounding or complex factors)
As a consultant, it would be wise to have a calculator designed specifically for your ideal client’s common problems (yes, you should have an ideal client and yes, you should niche your expertise – more on that in a different post). Showing the value of the problem with the client’s own numbers (they told you they are facing a 20% churn, each client is worth $20/m, and they acquire 100 new customers per month). You can then apply your expertise to how to best seal these leaks in their product and retain more customers.
Assuming you are confident in your abilities to retain 50% of their walk-away clients, you can articulate to your client the value of your service to be upwards of $12,000 per month. Don’t forget to show them what the long-term value is: $144,000 per year.
If you project it will take you one month of full time work to achieve your goal, you will have worked 160 hours (40 hours for 4 weeks). If you charge $200 per hour, you will charge them $32,000 to save the client more than $144,000 per year.
To put that in perspective, at their current churn, they currently lose $32,000 every 45 days.
After learning about their problem, calculating these numbers, and demonstrating your value, you can close the deal with, “Mrs CEO, how soon would you like me to start?”