Should your consulting business charge flat rates or hourly rates?

As you probably know, many of our clients are consultants or are service providers transitioning from done for you services to a consulting model.

In our strategy sessions with those folks, our conversations often turn to the pros and cons of flat rates versus hourly rates. And this happens to be one of my favorite topics! Most folks we work with are early in their consulting work, or making a career transition from traditional employment to self-employed consulting, so their default is to charge hourly rates.

But is charging per hour the right solution for consultants?

Spoiler alert: I 100% believe that charging by the hour is not only a bad deal for consultants, but it is the root of a lot of poor client-consultant relationships.

The following are the pros of charging your consulting clients by the hour.

1. If something takes longer than you expected, you're covered. This can be a big deal for some people in their workflow. If the scope of work changes, you don't need to draw up a new fee agreement if you bill hourly.

2. If your consulting business is consistently booked out, you can predict your income fairly easily, as it's akin to a "day job." Clients tend to understand that if they want more work, it will cost them more money.

3. Hourly rates can feel less risky to newer consultants. They can simply say, "My hourly rate is $X." Psychologically, this can be less scary than saying "My projects begin at $2,000."

4. Hourly rates can be appealing to clients who've never hired a consultant before and are used to the employee model.

Now, let's look at the cons of charging hourly rates for consulting work.

1. You have uncertainty about how much money you'll make from a project.

2. Your client has uncertainty about how much they'll pay for a project.

3. It can create a fuzzy line between consultant and employee, which clients interacting with you like you're an employee. This is not only touchy in terms of your professional relationship, in the US it can potentially create legal problems if the client is dictating the terms of your time in the engagement.

4. Your overhead costs will increase, as you have to track time and present a detailed itemization to the client.

5. You may find yourself having to justify why something took you a certain amount of time.

6. The more skilled you get, the less money you will make. Basically, here's how it works: you get more experience in running your consulting business, you develop efficiencies, which means less time to reach the same outcome for your client. All the sudden, you can achieve in half a day what used to take you a week. Sure, you can raise your hourly rate but very few consultants can get away with extremely high rates.

7. Which means, you have to take on more and more clients to make the same amount of money. This was the trap I fell into when I was still charging by the hour.

So if hourly is so high risk, what are the alternatives?

Fixed rate, fixed scope work can be empowering for consultants and clients alike.

The following are the pros of creating fixed rate fee structures in your consulting business.

1. It incentivizes you to create efficiencies. If you're fast, you actually "buy" yourself more free time for personal projects, pursuing learning opportunities, developing info-products, etc.

2. You and your client both know how much money will be exchanged, reducing money anxiety all around.

3. Generally lower overhead as you don't need to create time reports and don't need time tracking software. (Though you still need a CRM like Dubsado, which I promise I'll touch on soon.)

4. Reduced chance for client disputes over fees, since you've agreed on the fees in advance.

5. You can confidently get compensated for all the study and experience you bring with you to the project.

6. Fixed rate pricing reframes the fee conversation from "what services am I getting" to "what value will you bring."

The following are the downsides of fixed rate fees in consulting businesses.

1. There are some clients who simply won't work with you because they're uncomfortable with pricing based on value.

2. Some projects will be more profitable on paper than others. This can drive some consultants bananas. My advice is to not stress about the variations in profits on each project but instead to focus on the big picture. Yes, some projects will be losses and you will learn from that and not let that happen in the future.

3. It can be hard at first to estimate your income and profits.

4. You will have to force yourself to develop systems in order for flat rate pricing to work for you. Some people hate this. No judgement, it's fine if you prefer that model, but it's important to understand the drawbacks as well.

5. There's a certain amount of self-discipline that goes with flat rate pricing, and it's not for everyone. Make sure you plan your time wisely and don't accidentally take on too many clients because you don't have to think about billable hours anymore.

As is pretty obvious, I'm fairly biased against hourly rates, even for new consultants.

As a client, I always have anxiety about how much it'll cost me and then I feel guilty when it takes very little time, because I want to compensate the consultant fairly for the knowledge that enabled them to solve my problem quickly. I also am uncomfortable with buying someone's time who's not an employee.

There are also some solutions that create some middle ground in your consulting pricing.

In particular, I'm a huge fan of the "Ask Me Anything"-style hour-long consultation. My office hours program is in this model and it's a wildly successful way to build trust with new clients. People can pay a flat rate and get good advice without sales for an hour. Acuity makes it very easy to set this up on any website—WordPress, Squarespace or Shopify—as do Book Like a Boss and Calendly. This can also be great if you have slower action takers in your audience, as you can build trust with them before engaging in a significant consulting contract.

Have you experimented with different pricing models? I'd love to hear what worked and didn't—drop a note in the comments or zip me an email to share.