I’ve lost more money through pricing mistakes than I care to think about. It was my #1 failing. Let me outline for you the path to maximising your profits. Avoid this costly mistake – don’t do what I did!

The biggest mistake I made was not believing the market would pay high fees. I didn’t believe a home user would happily pay $30 to $40 per hour - my mind told me $20 was a sensible rate. I thought $25 per hour must be tops for a business, when a realistic rate would have actually been $65 per hour.

What it boiled down to was that I did not do my research. I should have phoned around 20 local IT business to get a feel for what people charge. Then I could have made more realistic decisions on what to set my rate at.

What should you charge? How to establish your rate for: Gaining market share when you start

You want low prices when first starting out. It will give you a chance to get your feet wet and get a feel for what the computer consultancy business is all about. Your repeat business will sharply increase because you are starting at rates that make you a bargain to your clients.

In addition, when you first start, you will be learning on the job. Every appointment will teach you something you didn’t know before and so it is only fair to keep your prices down. However, you need not keep them low for long.

Maximising profits and retaining profitable clients

Charge what you can get away with, but don’t do it to the extent that the client looks elsewhere. Find out what the market rate is and don’t be widely different from that benchmark. Certainly, you can distinguish yourself from your competitors and charge higher than the average but don’t go overboard.

I suggest raising your rates more slowly for your top clients who are giving you a lot of repeat business. You don’t want to upset the applecart. Just let this cash cow feed you revenue and look at optimising from new clients.

If you have a very good client, offer them some deals that will make them stay with you and encourage them to do more business. Offer them a discount of 10% if they do more than X amount of business in any one month. X can be, for example, their average level of monthly business + 20%.

Ideal rates for the top 3 markets

Market #1: The Home Market
The maximum most home users are prepared to pay is $40 per hour. You will loose many sales if you charge more than this. Ideally, a 2 hour appointment at $40 per hour brings the best return for your time. You’ll loose some sales but you won’t be working for next to nothing either.

Market #2: The SOHO Market
Spending $25 per hour will seems too cheap for the business market. The client may doubt your competency so I suggest a minimum of $40 per hour. Ideally, charge $48 per hour or more for general IT help. Up this rate as you get busier. Also, charge more for specialist help such as programming or website marketing advice.

Market #3: Larger Companies
Check out what the competition charges. Larger companies are more concerned with getting the job done properly than shaving a few dollars off your hourly rate. Give them a market rate and they are likely to believe you are established and competent.

Charge them a silly price (like $240 per day) and they will think you are an amateur. Go for something like $470 to $720 – the fees of a pro.

Your fast-track pricing strategy to high fee consulting

Week 1
When you first start, I suggest you charge $20 per hour. The majority of people who enquire about your service will buy from you at this low price. Once you start to get more experienced you will know when it is ready to start increasing your prices.

After 1 month
In your second month, I suggest you hike your price to $25 per hour and then $28 per hour. You’ll convert less enquiries but will earn more. In addition, you will feel good at your higher rate of pay. You won’t loose that much business at this rate as it will still be competitive.

After 3 months
You should be charging $32 per hour by now with home users and $40 to $56 per hour with business clients. If you don’t you are underselling yourself and working needlessly long hours for less pay.

After 6 months
All your work should be at $40 per hour for home users and $48 to $64 per hour for business customers. You are now a professional and should be paid a professional’s rate.

If you can fill your diary at this rate then you can earn close to a $1,600 in a week if you work hard. I did after only 9 months in the business, yet I didn’t have the knowledge that I’m giving you now over what to charge and how to expand. You should do it faster than I did.

1 year +

Start regularly culling the least profitable 15% of your clients. You want to focus on your high fee, high repeat business clients. You should be charging by the day where possible. Training groups of people should give you $640 per day + expenses. Software development can be charged at a similar fee. Support rates can be $80 per hour and a call out charge or higher if they want work done almost immediately.

These are pricing guidelines only. Use your head and decide what you think is best for your particular market place. Nevertheless, do take note of my suggestions. They will help you price more wisely.
When to charge by the hour and when to charge by the project

When you move into the business market, opportunities come up for project based work. The client may want you to network their computers, or they might want some software designed. Both these types of project can be charged at an hourly rate.

Alternatively, you can earn good money by quoting a fixed price for the entire project. This way, if you finish in good time your hourly rate effectively goes up. If you take your time or make a mistake in estimating the project length, your hourly rate goes down.

One of the main causes of under-quoting project cost is because you don’t tie down the client’s requirements with enough accuracy. Always get their specification in writing and aim to understand precisely what they are looking for. If you don’t, you will become a victim of “scope creep”.

This is where, half way through the project, the client says, “Oh, I thought that was obvious. We expected to have that quick search feature in at your quoted price.”

The client believes: that it was obvious, it was your responsibility to ask the necessary questions to elicit what they want and they told you anyway!

Therefore, get everything in writing and get your client to agree to your written specification. Have them sign it if they want to go ahead. When quoting, it helps to add 15% to your expected price as a contingency for scope creep. Just give your client your price and don’t tell them you’ve already factored in 15% for goodness sake!

If your client is a little unsure of what he wants and the specification is vague, only work on a Time and Materials basis, i.e. by the hour. If you don’t, you could end up doing much more work than you anticipated. Their vagueness gives them license to throw in all sorts of additional work and you have to do the work if you want to get paid. That is the risk with fixed fee projects.

I know one software developer who calculates how long he thinks a project will take and then doubles that estimate. He believes its accurate in the end, when you consider all the client conversations, bug fixes and support you have to provide.

In summary, the tighter the specification the better it is for you to quote on a fixed fee basis. A fixed fee also helps the client since they can budget better when compared to an hourly rate with its uncertain total cost.

5 ways to bump up your charging rate

Method #1: Discovering your clients budget
Ask them what they have set aside for this project. This has already been discussed but it is so important that it needs reiterating. Quite often I have guessed they have about $4,000 put aside for this project. Then, after questioning, they say the department has allocated $8,000 in funds! I can come in with a quote for $7,000 and everyone’s happy.

Without this knowledge I would have tried to keep my price as low as possible to secure the sale - that would cost me money, possibly thousands.

Method #2: How time critical is the work?
If they’re in a hurry they’ll pay a premium. If you were dying of thirst in the desert, what you would pay for a glass of water? The same goes for people in business. If they have a real problem on their hands they need your help and they need it fast. Money becomes less of an issue.

We had someone with a database problem that put 40 admin staff out of action. They usually spent all day every day using the database but it had gone belly up. I quoted $500 for a same day fix and they said yes. They got in their car, drove 45 to our premises and left us with their Server for 2 hours. It took me 10 minutes to fix.

He picked it up again later that day and they were the happiest clients in the world - and I earned $500 for very little work. But think of the cost to the client if they didn’t get it fixed.

Always bear this in mind. If you had 40 staff paid $120 per day all siting around twiddling their thumbs, what would you pay for a fix? They were loosing $600 per hour in staff costs alone.

Method #3: How important is the work?
Here’s a buzzword for you: Mission Critical. If a task is Mission Critical, it means they can’t do without it. Let’s say they have an order processing system that falls over. That’s pretty much Mission Critical to my mind. If they can’t process orders they’ve got serious problems. They’ll end up with lost and dissatisfied customers.

Work of this nature is not always time critical. Someone may want and need a website but there’s no one holding a gun to their head with a deadline of one week.

Mission Critical work needs to be done well and with assurances. Charging a premium rate for this type of work is fine, as a client perceives a high charge as meaning quality work done by professionals.

Method #4: How much competition is there?
If you are facing competition your pricing may reflect how much you need the business and how much the competition are charging. However, when you are the only person they have spoken too or your niche is highly specialised you can get away with premium rates. Where else are they going to go?

Method #5: Were you referred to the client?
Client referrals are one of the nicest ways to get a new client. They don’t cost you advertising money, they are preconditioned to thinking you are the people to go to and they are the easiest ones from which to get a sale.

You can also charge a slightly higher rate because of their confidence in your work. Check to see if the referrer has already given pricing information to them before you bump your rate up. You don’t want to look like you’re overcharging them.

Also, be sure to phone the referrer and thank them for the lead. This will encourage them to keep recommending you. Maybe even offer them a percentage, like 15% of all billable work done with that client for the first 3 months.

Knowledge to profits: how increasing what you know will put more dollars in your bank account

Customers pay for what you know. The more you know the more you are worth. There is a well-known tale that illustrates this point. A submarine develops an engine fault and the captain gets an expert in to fix it. The expert goes to the engine room and puts his ear against the enormous structure. He moves along the entire engine bay, just listening carefully. He spends ten minutes doing this.

Then, he reaches into his bag and takes out a hammer. He taps a small nail into the engine and all of a sudden it starts to work perfectly again.

The captain asks him how much the charge is and the engineer says “$1,000.” The captain goes mad and demands an itemised bill. The engineer gladly obliges and hands it over. It says:

One 2-inch nail: $1
Knowing where to tap: $999
Total: $1,000

The moral of the story is its what you know that people pay for.

Staying ahead of your competitors

Your level of knowledge is always going to be compared to your competition. If your competition appear ignorant in an area you are strong in, you will command a higher fee. But the reverse is also true.

Therefore, I strongly suggest you constantly upgrade your skills and create an educational blueprint for yourself. Decide how many hours per month you will put aside to honing your skills and try to stick to it. Sure, during very busy periods it is more important to do billable work than adhere rigidly to your educational goals. Nevertheless, commit yourself to catching up in the following month so you will always stay on track.

I suggest a minimum of 5 hours per month. You will be learning a lot on the job anyway but concentrated study on high payoff areas will reap dividends.

For example, if you know one of your top clients is looking for a website in the near future, it pays to start studying that area. It’s too late to start learning when a client has an immediate need and you have no skills in that area. It takes a while to acquire IT skills so spread it out over time.

Learn all the industry buzz words so your clients perceive you to be all knowing. Use Supermemo for this. They have a list of industry buzz words in their IT collection of learning material. It can be found at www.supermemo.com.

Study hard and you’ll soon know more than the competition. You’ll loose fewer clients and you’ll earn more for less hours. A knowledgeable IT consultant is worth their weight in gold.

What to spend your money on and how much

When you start off it is likely that your resources are severely limited. You need to spend your money carefully or you will run out! But you do need some learning material.

I suggest the following and get them in this order:
1. A comprehensive book on MS Word
2. A comprehensive book on Windows 98
3. Supermemo
4. Supermemo IT collection

If you have existing speciality skills (e.g. Java) and you want to target that market, then this list will obviously not apply. Instead, you would need one or more comprehensive reference manuals on your chosen field. Don’t just rely on the help menus of the particular application.

The cost of all 4 items can be had for under $160. Get them near the start of your business, as this is when you will have the most spare time to study. You also need it the most at outset because you lack experience.

When you go on appointments, keep them in your car. My reference manuals have saved me from embarrassment on numerous occasions. They act as your “Get out of Jail Free” card when confronted with something you know little about.

How to increase your knowledge for free

Are you really strapped for cash? Got nothing in the bank yet? Then learn using the following techniques:

• Use the application help menus. It’s a little more difficult this way but using F1 for context sensitive help is great for learning on a need-to-know basis

• Learn at your client’s premises. Half the time they leave you to your own devices, as they don’t understand what you are doing when you’re fixing their problem. These represent great learning opportunities. Since your starting consultancy rate is so low, they have little cause for complaint if you take slightly longer than would an experienced consultant.

• Use the internet. There are plenty of free training sites on the net. If you don’t have an internet connection then get one immediately. You really need one and right from the start.

Smart ways of getting answers to difficult questions

Getting answers to tricky support questions can take you hours. Much of the time this work is unbillable. So, my solution for getting answers to difficult questions is to delegate it. Use the internet newsgroups and forums. There are literally tens of thousands out there any they cover any subject imaginable. You can post a difficult question and get multiple replies all within a matter of hours. These communities have tireless contributors who enjoy helping others solve problems they once faced.

This resource has been so helpful to me over the years that I insist you learn about it straight away. Put down this manual, connect to the net, go to a search engine and do a search on Usenet. Learn all you can.

Go to www.deja.com and search for Usenet answers to questions that have already been asked. Chances are you will find your answers here straight away without having to wait for a reply. Then go to www.forumone.com or www.delphi.com and get a feel for what a web based forum is.

If you haven’t heard of newsgroups or forums before you’ll be thanking me for years.