Thinking about pricing and consulting

I was talking to a new business owner who had just started with consulting. Her first client was her old company, who hired her back for the same responsibilities – and the same pay. They argued, “Why should I pay you more than I paid you as an employee?” She couldn’t think of good reasons, but at least she negotiated that the monetary equivalent of her benefits and leave would be included in her new compensation.

The standard advice on why you should raise your rates – maybe even double or triple them – when you go from being an employee to being a contractor include these reasons:

  • You pay for your own benefits and downtime, so the employer doesn’t have to take on those costs
  • You have to do your own marketing, so you should charge clients more to give you some buffer for business development
  • You have no job security, so the employer has more flexibility; they don’t have to pay you if they don’t have work for you, while it’s harder to hire and fire employees as the workload changes
  • You take on more risks and have less legal protection if, say, the employer doesn’t pay promptly

It feels like these reasons are from the contractor’s point of view, though. I wouldn’t feel comfortable telling a company that the reason why my rates are higher than the salary they might pay an employee is because I have to do my own marketing and business development.

I’d rather focus on the value I may be able to deliver. Is it worth it to the company to pay $X for the results they believe they’ll get with me? If so, great. If they don’t think it’s worth it, they’re welcome to find people with different skills, people with lower rates, or people who are willing to join the organization as an employee. Likewise, is it worth it to me to work on an engagement for $X, instead of focusing on other things I could be doing?

Contractors and companies make decisions based on self-interest, so it’s easier to not stress out about pricing if you remember that the other organization is responsible for getting the best deal they can get and you’re responsible for getting the best deal you can get. Lawyers and accountants make no apologies for the rates they set, and maybe I’ll work my way up to that kind of unblinking confidence someday.

Besides, I want to set aside more time for non-consulting ways to create value. I may raise my consulting rate even higher so that I focus on only the opportunities with high leverage and scale.

Potential clients might ask you why your rates are higher than employees or competitors. Instead of going down the defensive route (oh, you have to take on more risk, etc.), it might be worth breaking it down into the real questions behind it:

  • How much are these kinds of results worth to you?
  • Do you believe I am capable of delivering these results?
  • Am I your best option for delivering those results?

I’m learning!