How should I approach setting an hourly rate? | Pricing | Consultant Launch Pad Community Forum

Peter has it right.  This is hard.  There are ways to make it easier.

I usually do it all in "hours" even though I try to charge by the job.  In reality, all you have is time to give unless you are also selling product.  That makes it more complicated, so lets ignore products for now.

1. Start from the top.  How much do you want to make (i.e., what do you want your W2 to say)?  How many hours are you willing to work in a year?  What's your sales and marketing overhead in hours (real hours that aren't billable)?  What's your "corporate" overhead?  Include the annual sales trip to Aruba, the monthly gym membership, medical, taxes, Internet presence and access, communications, travel, …  From that, you can calculate an hourly rate.  Let's call that rate A.

2. Start from the bottom. How much is your time really worth?  If you recently worked for a large company that "sold" people like you for customer projects, you have it easy.  What your company charged for you is one measure of your value.  It also allows you to figure out what your prior company's overhead + profit was, often 2.5 – 5 times what they were paying you, or even more.  Thus Peter's comment that your overhead isn't as high as a big company, unless you really want that annual sales meeting in Aruba.  Find out what your competition is charging.  (Like, maybe, ask on the forum.)  Call this rate B.

If rate A is even close to rate B, you are done.  Live long and prosper.

Usually rate B is significantly lower than rate A.  There are two possibilities:  your estimation of your value is not realistic, or you aren't comparing yourself to your real competition.  What makes you unique?  What niche can you absolutely claim as yours?  The smaller your niche, the more you can charge.  As a side benefit, the smaller the niche the smaller the target market and the more focused your marketing and sales efforts are.

I was one of two owners of a small consulting firm in California.  The state funds all education, including vocational education to high school students and adults.  Each county was responsible for its districts, and the districts ran the actual courses. We understood how this worked and had a software and process solution.  We only had 58 potential customers, and we actually only cared about the large ones.  Our customers always passed their annual state audit the first time.  The company's president's philosophy was to increase our rates until we only worked half-time.  We never worked just half-time.

I'm not a believer in discounting rates to "buy-in" to a customer.  That first project sets a lot of precedents, including your rate.  I'm willing to give away maybe a day's consulting as pre-sales effort.  Personally, I believe in the creeping commitment plan.  Sometimes, this is known as the camel's nose in the tent ploy.  I start out with small projects, each leading to the real goal, but always with the clearly stated ability of either side to wander off at any point.  The trick is to make sure that each little project provides measurable value to the customer, and appropriate revenue to you.  The end of each project includes a report that emphasizes the results and the customer's value, and a proposal for the next phase.  

Find out how much the person you are dealing with can sign for without requiring more than one layer of approvals.  Keep your proposals under that value until you have established your reputation (by making your customer contact person a hero).

Smile a lot.