One of the first questions new consultants have to settle is how much to charge for their services. Once you’ve decided on that, the next question that arises is, should I charge by the hour, the project, or set up retainers? This was the topic of a recent Consultant Forum discussion led by EM Partner and CFO Dan Holmes, with contributions from Digital Marketing Consultant Mark Harnett and Analytics Consultant Sam Fintz and other community members.
The general wisdom is, it depends — on what you’re being asked to do, how clear the client is on what they want, and how you like to work. Ultimately, it comes down to managing risk: how confident you are about how long something is going to take, and how likely is the possibility of scope creep. Your goal is always to protect your time, and therefore your income. But it is also to charge appropriately for the value you deliver, which does not easily break down to an hourly rate because not all hours deliver equal value.
In Praise of the Fixed Fee
Anytime you have a clearly defined end product that you have lots of experience delivering, and the project has a set time frame, that lends itself well to fixed fee pricing — either via retainer or per project pricing.
Both give you the opportunity to leverage your experience and speed. You can do things better and faster than someone else your client might hire to deliver the same work product. You should base your price on the value that is delivered to the client, not on the time that it takes for you, the expert, to do the work.
Here’s a simple project-based example: If you’ve written hundreds of press releases and can deliver near perfect copy every time in three hours at an hourly rate of $100, that’s $300 per press release.
However, consider the client’s likely alternatives: having an internal copywriter or product marketer who has written a press release or two do the job. This may seem like a clever alternative to the inexperienced manager.
Then they realize this person has to be coached on press release writing, which the manager may or may not have the time or expertise to do. Their time will have to be managed, as they have other priorities. Their draft may have to go through multiple revisions, and then the quality of the work product may not be that great. Even if it is, there was a lot of friction in getting there.
They could also have an agency do the work, but that likely requires an ongoing agency contract and retainer, slow turnaround times, and a hefty markup.
The value is not only in delivering a high-quality work product on deadline. It’s in the flexibility to jump in quickly, ready to go, at a reasonable cost, without the manager having to worry about it once the assignment is given. This is why you can charge at least three times that amount, even if you can do it in three hours. You have to be paid for the value you’re delivering, and the skill that allows you to do it that quickly.
The Ongoing Retainer
Now let’s say the client wants you to do three press releases a month, every month, indefinitely. This can be set up as an ongoing retainer. The definition of retainer is a set fee for a defined time period. For the client, retainers provide a predictable budget, along with a guarantee of having a resource at the ready.
For the consultant, they guarantee steady income. You don’t have to log every quarter hour, but you do need to make sure that you don’t exceed your hours by too much during peak periods.
In exchange for a retainer agreement, you may want to offer a discount over project-based pricing or over your hourly base rate. Or not. This is something you can decide based on how busy you are, and how much you want to win the business.
Your retainer amount should be reflective of the value delivered, with your hourly rate as an underlying baseline. You should look at it as a reservation for X number of your hours during the agreed upon time period. As such, you should bill the retainer fee whether or not the client uses all the hours (assuming of course that this was due to a client-side issue, and not your own failure to do the work) because this is time you could have made money working for a different client.
Retainers lend themselves well to ongoing work in areas of expertise such as managing social media, digital advertising, or working on a product launch. You always want to make sure that the scope of work is well-defined, or the client can begin to see you as an employee that they can toss anything at if there are hours available.
Another challenge is that sometimes the client never calls or gets around to assigning the work to be done. Although you should still charge your fee, neither you nor the client is likely to feel good about that situation for long. So, you may need to push them to make the assignment, or take the lead in defining and assigning it for them.
The Exploratory Retainer
Retainers can also work well in situations where the work product and time frame are less well defined. Let’s say your client wants you to set up tracking and reporting dashboards — work you’ve done lots of. But you don’t feel confident they know what all their data sources are, whether their tracking is working correctly, and what condition their data is in. It could turn out to be easy — or not.
One way to handle that type of situation is to set up a retainer for small increments of work, 20 hours at the most, until you can get a handle on the project and either work your way to a project price or an ongoing retainer agreement. Collect the retainer up front and let the client work against it, similar to what attorneys do.
To protect yourself on the downside, set an end date so the possibility of tapping the hours doesn’t linger out there forever. This type of arrangement limits your commitment and protects you against scope creep while you help the client learn and better define their needs. For the client, it provides a cap on costs while you explore, and helps them get a clearer picture of their needs. For you, it can give you a better sense of whether this is an engagement you want to expand.
By the Hour
When the scope of the work is poorly defined, you may decide to charge by the hour. This obviously keeps your income level intact and can help protect your time, but it creates a different kind of relationship with the client, one in which they are always aware that the meter is running.
It can also imply a lower level of client commitment than a retainer or project based fee, and coupled with a poorly defined scope of work, it often does. It takes time to get clarity, so when they have it, it is often the result of having to have made the business case for investment tied to a strategic plan. That kind of engagement is usually much stickier than an hourly gig doing random acts of marketing.
The problem with working exclusively by the hour is that there are only so many hours in the week and you’re most likely eliminating the possibility of being paid for efficiencies you create by being an experienced specialist.
To return to our press release example, let’s say you get so good at writing press releases that now you can do them in half an hour. Does that mean you should you only charge $50, half your hourly rate? Of course not. Then you’d have to crank out eight press releases a day to make a living, which would be exhausting.Or, let’s say that as a digital marketing consultant, in your first week on the job you spot a targeting error in Facebook Ads. With a few clicks, you change the settings and save the client tens of thousands of dollars. You can’t charge a big enough hourly rate to account for the value you created in those few minutes. You probably can’t charge enough through project-based pricing or retainers, but you can come closer to getting paid for the value you’re creating.
That said, if you work in an area where the work is by its nature unpredictable, charging by the hour may be your best option. Just be sure to raise your rate as your value proposition improves over time.
A Positioning Exercise
Ultimately, the way you structure your fees is a positioning exercise. Clients who want to pay by the hour think about human labor in an hourly salary kind of way. And they're trying to compare you to that, even though you may be far more efficient and effective with time than a salaried person.
What you should be trying to do as a consultant is reposition your fees in terms of the value that you’re bringing to the company. It's a completely different way of thinking about it. Even then, some clients will try to translate that back into counting hours, so you can’t always get away from it, but you should always communicate your fee in terms of value, not hours worked. Being paid hourly could become problematic. Many states and some companies will consider hourly payment evidence that you should be hired as a W2 employee.
If you’ve been working by the hour, there may be a positioning exercise here for you as well, one about learning to value your own time differently. When you put yourself in the hourly category, there’s a tendency to think of every hour as a sellable unit, each one equal to the next. In theory, you could sell each of your eight hours of the day to a different person.
The reality is, there are switching costs associated with moving from task to task. Even if your hourly rate is quite high, you will likely find that even at your top rate, there is a level of hours below which it just doesn’t make sense to engage. That is an indication that you should be thinking differently about how you provide value, either as an expert on demand, or by delivering entire projects, and working your way toward charging accordingly.