First, research your competitors' rates. Then decide on a pay structure and avoid undervaluing your knowledge and services
I'm an entrepreneur turned consultant. I am constantly facing the compensation dilemma, particularly regarding pay structure. Can you lend some expertise? —J.F., New York City The rule is to charge what you are worth and what the market will bear, says Gene Fairbrother, a longtime small business consultant with MBA Consulting in Dallas. Do you do simple consultations, or do you offer value-added services? For instance, a plain-vanilla Web site designer would charge a lower fee than a designer who not only builds but also hosts Web sites and designs clients' marketing strategies. If you want to charge higher rates, make sure you highlight the fact that you're going beyond basics. How do you determine the going rate for your consulting services? Conduct a competitive evaluation at least once a year, Fairbrother says. It's easy enough to survey competitors' Web sites, request their pricing sheets, or consult your industry association to see what others in your field are charging. Use Some Ingenuity
"The challenge is how to get the information when what the competition charges is not so openly shared," Fairbrother says. In those cases you might have to use some ingenuity. For instance, ask a friend to visit your competitors and get written estimates for specific jobs. This technique may seem sneaky, but "knowing what the competitive market is for products and services is simply a business survival basic," Fairbrother says. In terms of pay structure, you have several choices, says Marcia G. Rhodes, spokeswoman for WorldatWork, a Scottsdale (Ariz.) trade group for HR professionals. The five most common billing scenarios for consultants are: hourly-based fees, project-based fees, contingency basis, retainers, and value-based billing. The hourly rate is fairly straightforward and will be based on your value and the going rate for your brand of consulting. Charging on a per-project basis involves starting with your hourly rate and estimating how many hours a particular project will consume, then billing for the total. This strategy is preferred by many consultants, Rhodes says, because clients know up front exactly what they are committing to financially. A contingency fee is used only in certain industries and is riskier because it is payable only if the work proves successful. For instance, a publicity agent might write and distribute a press release at no up-front cost to a client. The agent would be paid an agreed-on amount, but only if the press release results in articles about that client, Rhodes says. Calculating a Retainer
The retainer model requires clients to pay a monthly amount to cover the consultant's ongoing work. Determine your retainer by settling on an hourly rate and then multiplying it by how many hours per month you will devote to a particular client. For example, a typical public relations consultant charges $150 an hour, Rhodes says, and the average monthly retainer is between $3,500 and $5,000. "A PR consultant with two to three clients would be considered to be doing well," she says. Value-based billing is what a consultant charges when she is confident she can save her clients substantial money. For example, a consultant designing employee stock ownership plans might save a corporate client $300,000 in taxes. "In terms of man hours, the consultant may spend only 20 hours total on the project," Rhodes says. "But the positive financial impact on the client is so enormous that the consultant is justified in charging $30,000 for designing the plan." However you decide to structure your compensation, don't fall into what Fairbrother calls "the cheap trap." Many new business owners begin by offering their services at the lowest possible cost. If you take this route, however, clients are likely to assume you are not as capable as other providers. Plus, "if you can't charge enough to make a living, you won't be in business very long," Fairbrother says.