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Too Much? Too Little? How to Set Fees for Your New Consulting Business

Tips to help you decide how much you should charge your clients so you earn a profit but aren’t price gouging them.

Entrepreneur

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To survive as a consultant in any industry, you need to charge fees that will enable you to stay in business; at the same time, both you and your clients need to feel that your fees are fair and equitable.

What is foul and what is fair?

So how do you find the middle ground that seems fair to everyone involved?

When it comes to fees, the first rule in the consulting business is to be flexible. Sometimes, you’ll find a client really wants to hire you but can’t pay your entire fee.

Depending on the situation, you may want to reduce your fee, either so you can get some much-needed experience or because you believe you can set yourself up for more work in the future by working cheaper now. But don’t sell yourself short; make sure you’re paid what you’re worth, since that fee sets the tone for future fee negotiations.

The figure you arrive at should include compensation for your time, and compensation for your business overhead, such as travel, office expenses and so on.

But when quoting a figure, leave room for some negotiation, because sometimes clients will ask you to reduce your rates by a set amount or a few percentage points to meet their budget. Just be sure you have a bottom line figure in mind when you sit down to negotiate so you know how much wiggle room you have.

At the same time, don’t try to wring out the highest possible fee from your clients. You want to be fairly compensated, but if your fee is too high, you run the risk of losing the business completely.

When setting your rates, you have several options, including hourly rates, per-project fees and working on a retainer basis. Let’s examine each one.

Hourly fees

Consultants often calculate a project cost based on the number of hours they expect to spend on it.

To figure out an appropriate hourly rate, you can either use a source like the Careers in Business website to see what consultants earn in your area, or decide how much you’d like to earn in a year and do the math to turn that figure into an hourly rate. Experienced consultants often double or triple the resulting figure to cover overhead, benefits and other expenses;

It’s reasonable for a new consultant to assume billable time will be around 50 percent, so double your rate so you’ll meet your expenses.. And if you think about it, a consulting rate of $40 to $60 isn’t out of line when you consider the expertise you’re offering.

Project rates

When working on a project rate basis, a consultant normally gets a fixed amount of money for a predetermined period of time (a situation known as “work for hire”).

It can be a little tricky to determine a project rate when you first start consulting because you don’t have historical information on which to base your hourly estimate.

But once you figure out how many hours you think the job will take, simply multiply that figure by your hourly rate, then add 10 percent or so to cover unexpected contingencies.

Retainer basis

Working on a retainer basis gives you a set monthly fee for which you agree to be available for work for an agreed-on number of hours for your client. This kind of fee arrangement is common for computer consultants and other providers of ongoing services.

While in the ideal world you’d have a dozen or so clients who hire you and pay you a hefty sum each month, don’t get your hopes up. Most companies that hire a consultant on a retainer basis have a clause in their contract that prohibits them from working for the competition.

Working and getting paid by this method certainly has its advantages. You’re guaranteed income each month, which helps with cash flow when you’re starting out in your consulting business. Some consultants actually offer a percentage reduction in their fees if a client agrees to pay a monthly retainer fee.

Bonus options

It’s common for consultants to have some type of bonus option in their client contract or letter of agreement.

A bonus may be a percentage of an amount that the consultant saves a client (if the consultant’s been hired to reorganise a department or division, for example) or the amount of money acquired for a client (as in the case of fundraising, collections or grant writing).

Although it’s not always possible to work out this kind of bonus deal, it never hurts to negotiate. If you do, keep in mind that the average bonus is 15 to 20 percent of the funds saved for the client or obtained for the organisation.

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How to Guides

Business Model Design – Picking The Business Model That Works For You

You have the need to make money. That’s where a business model design comes in.

Anthony Miller

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So, you’ve picked your lane.  You’ve decided what you want to do and why you want to do it.  You’ve picked something you’re good at.  You’re convinced the world needs and values it.  You now need to decide how to make money.  That’s where business model design comes in.

There are plenty of business model options for the same idea.  For example, let’s say your idea is to offer historic tours of Cape Town.  You could either do it yourself or hire professional guides to do it.  Or you could use mobile technology to provide DIY walking tours.  You could charge per tour or you could charge a membership fee.  There are so many options.  How do you pick the model that works for you?

The Lean Canvas is a great tool for entrepreneurs who are faced with this question. Adapted from The Business Model Canvas, it provides a simple, one page framework for brainstorming possible business models, prioritising where to start, and tracking ongoing learning.  It walks the entrepreneur through the business model process logically and ensures the key elements of a successful business are considered.

Related: Want To Change Your Business Model? Answer These 3 Questions

The Lean Canvas

lean

My co-founders and I have used the Canvas extensively at Simply – for designing our business model, and for communicating it to partners and investors. The only thing you know with certainty when you start a business is that it’s not going to turn out as you expect it to.  The Canvas evolves as you go – it was, and continues to be, a very useful guide in our journey.

We figured there was an opportunity to do something disruptive in the SA life insurance space.  It was clear to us that lots of people were either not covered or getting a rough deal.  Guided by the Canvas, we defined our first Customer Segment as adult South Africans, aged between 25 and 45 and earning between R5k and R30k monthly.

We then identified the 3 big Problems – specific to that segment – that needed solving:

  1. Most of the people in our segment have some form of funeral cover, but very few have life or disability cover.
  2. The cover they do have is often expensive relative to the benefits provided (i.e. a very small % of the premium goes towards the risk costs).
  3. There is no simple, intuitive way to buy good value life, disability and funeral cover online.

Next came the Value Proposition.  We believed we could use technology, digital marketing and human-centred product design to deliver simple, online life, disability and funeral insurance at a great price.  We felt we could be for life insurance in South Africa what Takealot has been for retail.  We thought the world was moving far faster than incumbents realised; that millennials were ready to buy life insurance online; that we could build for the digital world and be in the right place at the right time.

Related: 4 Types Of Business Models

And the rest flowed from there.  I don’t have the time or the space to walk you through the other elements of the Canvas here, but you can probably fill in the blanks.  Suffice to say, the process was invaluable and enabled us to build our business around a clearly considered business model.  It’s early days, but the signs are good – we’re making a positive impact, having fun and keeping our investors happy.

So, how should you go about sketching your own Lean Canvas?  The team at www.leanstack.com and suggest the following approach:

  1. Sketch a canvas in one sitting. While a business plan can take weeks or months to write, your initial canvas should be sketched quickly.
  2. It’s okay to leave sections blank. Rather than trying to research or debate the “right” answers, put something down quickly or leave it blank and come back to it later.
  3. Think in the present. Business plans try too hard to predict the future which is impossible. Instead, write your canvas with a ‘getting things done’ attitude.
  4. Use a customer-centric approach.  You may need to sketch one Canvas per customer segment.  Start with the Customer Segment and go in sequence.

In summary, the Canvas has brought clarity and a common language to our business model design process.  It’s enabled us to agree upon and communicate our business model effectively – both internally and externally.  It’s also allowed us to tune and adjust our model as our story has unfolded – an inevitability for entrepreneurs.  I highly recommend the Lean Canvas as a tool for designing your business model.  Give it a try – I think you’ll like it.

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How to Guides

Alan Knott-Craig’s Answers On Selling Internationally And Researching Your Idea

There is no ‘one size fits all’ secret to start-up success. But there is a recipe that can be followed. It starts with being willing to go the extra mile: To know more about your business, customers and their needs than anyone else.

Alan Knott-Craig

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What is the secret to success? — Anonymous

Success is not about winning. It’s about not losing. In other words, being successful is not about increasing the odds of winning. It’s about reducing the odds of losing. There is one simple way to reduce the probability of failure. Go the extra mile.

In everything you do, do a little more than expected. Need to prepare a proposal? Format it, add page numbers, spellcheck, PDF. Need to instal a router? Arrive early. Finish early. Dress neatly. Smile. Need to refund a customer? Be polite. Don’t delay. Apologise. Follow up. Need to provide 5MBs? Provide 10MBs. Need to be at work at 6am? Be at work at 5.30am.

Go the extra mile. Over-deliver. Blow away everyone in every little thing you do. If you do that, from the littlest things to the biggest things, you will have the lowest odds of failure.

In other words, you will not lose. As an entrepreneur, not losing is winning. Go the extra mile. It’s less crowded.

Related: Alan Knott-Craig Answers Your Burning Start-up Questions On Ideas And Partnerships

I’m a virtual business on Johannesburg’s East Rand and I want to expand my target market to the US. I unfortunately don’t have any international network that I can tap into.

I’m investigating Fiverr, Reddit and Upwork as potential avenues of work and market research tools. I have also made contact with an international VA agency. What else do you recommend I do to break into the international market?  — Jade

Selling internationally is no different to selling locally. It’s all about growing your network, sweating your network, and putting yourself out there.

Everything you’re doing is right. Chase all potential channels to market. Tell family and friends. Ask clients for references or leads. Don’t forget the magic of Google AdWords. And a LinkedIn Premium subscription.

Make it easy for your potential customer to find you. If you’re going to use an agency, remember this: Make the agency rich. Don’t begrudge your ‘sales arm’ making money off your sweat. The more money the agency makes, the more business it will send your way.

I’m based in a small town where people are accustomed to what they know as opposed to adapting to something new. I’ve advertised in the newspaper, sent out fliers and have a Facebook page with over 500 likes. So far, the response to my tutoring service business has been slow. How can I improve? — Stephanie

You’ve made a big assumption: That there is demand for paid-for tutoring. Generally speaking, you should sell your product before you start your business. Sell it, then build it. It’s safer.

But maybe you’re on the right track. In addition to paid-for marketing, consider channel partner and referral programmes. Go to your local high school, meet the maths teacher, offer a commission for every student she sends to you for tutoring. The maths teacher becomes a channel partner, allowing you to put up posters at the school, and referring clients.

Even better than channel partners is a referral programme: For every new client referred by a client, give the client a 10% discount, or a month free.

At the end of the day there is no shortcut to getting more customers. Start with one. Make her happy. Let her tell a friend. Tutor the friend. Rinse, repeat. Over time your service reputation will grow and word of mouth will bring customers to your door.

Related: Alan Knott-Craig Answers Your Burning Start-Up Questions

I have an idea to build a mobile platform to connect all informal artisans in SA to potential customers. Uber for artisans. Will you invest? — Neo

Great idea. Some questions: How do you displace the other informal platforms in SA, such as Gumtree? How do you de-risk your business before raising capital? Can you secure funding without selling equity?

Before you give theoretical answers, remember this: The questions are not theoretical. No one should back you unless you have the above solved in reality, not just in theory.

In other words, raising capital is only realistic once the risk is so low you almost don’t need to raise capital.


Listen to this

Alan’s audible book Be a Hero: Make Life an Adventure is now available on amazon.com and Audible.com

Read by Alan himself, Be a Hero is a collection of stories on how to make your life an adventure by changing your mindset and tackling adversity.

Go to amazon.com or audible.com to download your copy. Be a Hero is also available in Kindle and paperback through Amazon.com.


Read ‘Be A Hero’ today

be-a-hero

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How to Guides

6 Tips For Transitioning From Idea To Operational Business

Forget Googling startup business stories. Instead, put your trust in the tried-and-true methods other entrepreneurs have used successfully.

Thomas Smale

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It takes only a few Google searches to become overwhelmed by the abundance of information available about entrepreneurial start-ups: Many, many stories exist about how this or that start-up transitioned into a successful, established business. But, in many cases, you’ll be left trying to fill in the blanks or still searching for case studies relevant to your industry or business model.

In fact, there’s only one reliable way to take your business to the next level: And that involves putting your trust in tried-and-true methods that other entrepreneurs have used to make the leap.

Focus on productivity – not activity

It’s all too easy to get caught up in a flurry of urgent tasks that demand your attention. Unfortunately, that can take your focus away from what matters most. So, avoid the busyness trap and ask yourself what you need to focus on today, or over the next two weeks, the next month, 90 days – even the next year or five years. Plan ahead so you know exactly what your next steps are.

Related: Admin Hacks For Entrepreneurs

Leadership expert and coach Leah Wultschik has noted in a blog post that when leaders engage in all manner of busyness – emails, meeting requests and so on – employees feel pressured to follow suit. At that point, the never-ending focus to get things done can result in decreased creativity. You’ll be constantly in a reactionary state, leaving you unable to make strategic decisions.

Don’t let yourself get to that point.

Hire the best talent possible

You are whom you hang around with. Wouldn’t you rather be around world-class workers who bring valuable ideas to the table than to try to squeeze what you can out of second-rate employees?

Aislinn Malszecki, who oversees content strategy and community at MaRS, suggests the following steps to attract the best talent possible:

  • Avoid reactionary hiring: Founders often find themselves desperately in need of help and may hire without looking for fit and the right skill set.
  • Create a buzz for your company: Utilize your reputation and personal network to attract the right kind of people to your business.
  • Tap into your network: In addition to posting jobs on your website and LinkedIn, leverage your network as well as the networks of your employees to find like-minded candidates.

Building your team is not a matter to be taken lightly. Surrounding yourself with the right people can mean the difference between breaking through and remaining stagnant as a business. Work with people who inspire you.

Partner with an agency

business-agency-partnership

The opportunity cost of doing everything yourself can add up fast. So, work with an agency. The up-front cost of outsourced work will ultimately be less expensive than trying to do it all yourself.

Patrick Woods, director of customer success at Keen IO, notes certain challenges of working with an agency. To overcome these hurdles, he suggests:

  • Build a relationship with the agency: Set aside time to get to know the people you’ll be working with. Determine fit as well as expectations.
  • Communicate: Since startups tend to move fast, communicate regularly and clearly with the agency to ensure you’re on the same page.
  • Understand what the agency can do for you: Clarify its staffers’ core strengths and competencies. Determine what tasks you’d like them to take over, and which you’re looking to handle in-house.

Related: Are You An Ideas Explorer Or Are You A Rooster?

Beware of negativity

Negativity can poison the waters of your entire company. Before long, you may find your whole team expressing doubt or disbelief. Conversely, being confident will instill a sense of confidence in your employees. They’ll also follow you more willingly.

Best-selling author and keynote speaker Jon Gordon has pointed out that negativity can affect the morale, performance, and productivity of your team. Negativity can also lead to decreased energy and increased stress.

When it comes to creating a positive work environment, the responsibility lies with the leader. You need to set the tone for your team, to draw the best out of them.

Avoid burnout

When you’re first getting started, and you’re excited about your business, you’re willing to do whatever it takes to get it up and running. Unfortunately, those 16-hour days will take their toll on you, and if you keep up that pace, you will burn out. Learn to rely on your team while growing your business.

James Schramko of SuperFastBusiness is an advocate for getting more rest and sleep. This flies in the face of what many aggressive entrepreneurs are saying today, but Schramko points out that proper rest can help you boost your performance. The costs of losing sleep can be significant, and include: Depression, a weaker immune system, memory issues, obesity and more.

The costs of burnout can be especially high if you render yourself incapable of working for a prolonged period of time. Consider the costs before letting yourself get to that point.

Prioritise

You can’t do it all. No one has more than 24 hours in his or her day, and we’re all busy. Beware of saying “yes” to everything, as you will eventually find it impossible to follow through on it all. If something doesn’t make you excited, don’t do it.

Derek Sivers,  founder of CD Baby, has said he lives by the “Hell, yeah!” or “no” philosophy. He explains that saying no to most things leaves room in your life for the few things that get you truly excited. If you find yourself wavering between a “yes” and a “no,” he suggests choosing “no.” Only say “yes” to opportunities that you can’t pass up.

Final thoughts

Transitioning from startup to established business can take time. So, don’t rush the process unnecessarily. When all the right pieces are in place, you’ll be able to shift smoothly from one stage to another. If you try to force the issue, you may end up with more problems than you bargained for.

If you have any doubts, go back to the basics. Take some time to determine what your priorities are. Start pruning any tasks or activities that don’t contribute to your ultimate success. If you have too much on your plate, ask for help or delegate. And above all, avoid taking on too much.

This article was originally posted here on Entrepreneur.com.

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