In case you’re new here (or just missed them) here’s the past few editions:

Welcome to arguably the most uncomfortable thing I did when becoming a HR consultant.

Uncomfortable for a couple of reasons.

“But Matt, you work in compensation. Make it make sense?”.

Yah, I know, but aside from building comp spreadsheets, how often do you really ever get involved in the pricing, revenue and mechanics of the business? 

Never? Yeah me too. But boy oh boy is running a business a crash course in learning finance (a skillset we all need IMO).

We don’t often advocate for ourselves when it comes to salary (horrible), for our own development (tragic) and we can occasionally find ourselves trying to be the impartial person — especially when it’s about what’s good for us. 

It’s probably why tech HR has an absurdly high turnover rate (a surprising 2 years 9 months according to Ravio). I suspect many of us reach a breaking point before we get the satisfaction we deserve.

So with that baggage out of the way, let’s talk pricing. So that you can get paid what you’re worth in this new career you’re pursuing.

This article breaks down how I set my rate as I leaped into the world of “this needs to pay all my bills or else I have to go get a job”. And newsflash, I really didn’t want to have to get a job.

I’m clearly someone who is partial to a spreadsheet, and hand in hand with the lessons I gleaned from my partner (who did a similar thing before me), this felt like the logical approach to take when I had nothing else to fall back on.

Here is the method I landed on to work out my hourly rate (the foundation of the pricing strategy we’ll talk through today).

The formula I used for this was:

My logic here was relatively straightforward. I earned ~$230k AUD per year in my last role, and I wanted to earn more. I didn’t want to be too ambitious (it was my first year after all), so I settled on $250k.

A quarter of a million dollars. Saying that now still sounds ludicrous.

You will have your own version of what is right for you. Choose that.

In Australia we have Superannuation (like a pension), and that was 12% of base salary.

Here is where you want to itemise your operating expenses. That is, the annual expenses associated with running your business. For me this was things like my software subscriptions, my accountant, and so on.

Operating Expenses (OpEx) are not to be confused with Capital Expenses (CapEx) which is the one off purchase you make for business stuff like a laptop (unless you’re leasing the laptop of course, in which case it’s OpEx). I’m not going further into detail here because I’m wholly unqualified, but basically try and line item each ongoing expense you have to run your business, and give it a value.

These should be relatively low for you as a service business.

Here is where most consultants I’ve spoken to go wrong. 

They think their salary + costs are the thing they’re charging enough to cover, and they don’t see themselves as a business that also needs to make a profit.

Profit isn't just "extra" money; it’s an essential reinvestment fund that transforms a (let’s be real) very stressful job into a sustainable business.

By charging a margin on your costs, you not only create a safety net to absorb things like unplanned absences from work, it could be deployed towards value adding things like professional development (time off plus course costs for example), or a myriad other investments you want to make in your business.

From what I understand of service based businesses, 30-50% is healthy for a service based business, and you should make sure to calculate profit margin, not markup (give it a google).

So if you’re following along with the example I gave earlier, it will look something like this:

Amazing, now we know what our entire cost is in a year. It’s time to work out how many hours we need to divide it across.

In this step we’re working out the number of hours we can realistically work in a year, so that we can then work out what our hourly rate needs to be.

First up, you need to know how many hours a day and week you’ll be working. This will give us our first figure, which is the total hours for the year.

Now it’s time to bring reality into the equation and work out our available hours. Because even if you are doing a 40 hour week, 52 weeks year, you won’t actually be working them all.

You’re going to take holidays and, unfortunately, you’re likely to be sick. So let’s make some assumptions on what that looks like.

Here in Australia, our statutory leave is 4 weeks of holiday and 2 weeks of sick leave, so I used that for my own rate (that’s 6 weeks x 40 hours a week = 240 hours less work a year…)

Great, now we’ve got our available hours — the hours we’ll actually be doing our jobs in a year. But there’s another deduction we need to make to ensure we’re being true to reality. 

Utilisation.

If you’re a HR consultant, you’re going to be delivering the work, but you’re also going to need to find the work, and sell the work (amongst other things, like admin 😴). 

For me, that meant things like keeping up a LinkedIn cadence (marketing), or having sales calls and doing proposals.

This stuff takes time, and you won’t be ‘charging’ during that time. So we need to figure it out in order to ensure our rate covers the time we’re doing these other activities.

I previously worked in a professional services firm, and a number spoken about as gospel was ensuring consultants had at least a 70% utilisation rate. 

That means that if they worked 10 hours, they’d be charging a client for 7 of them.

Now that company had its own sales team and other complicated things that we don’t have, but I’ve found over the past couple years of doing this job, that 70% is a pretty reasonable figure, all things considered. But choose a number that's right for you.

To get to our final number, we then need to take our available hours, and deduct 30% from them. These are our billable hours.

By now you’ll be starting to feel a little uncomfortable, because you’ve probably started to realise how few hours across which you have to earn all that money. Speaking of which.

Now here’s the fun part.

We simply divide the annual income figure we determined earlier, by the number of billable hours in a year.

Presto 🪄 — you have your minimum hourly rate.

I’ve created a ‘rate builder’ app that is the exact process I used to determine my own hourly rate, and making this available for those who are supporters.

I feel like I needed to make this its own section because, if you’re anything like me (and especially if you have the professional self doubts I mentioned at the start), you’re going to be truly second guessing your worth right about… now.

All sorts of things are probably running through your head, including:

And sure, check your maths, but your number is probably right, and I’m here to tell you that you are worth it.

At the start I questioned every proposal I sent, and even after they accepted it, I questioned whether they’d pay the invoice. 

And guess what? 

While I might have lost proposals on price, the work I did win was amazing and I’ve legitimately never had an issue with invoicing.

Do not negotiate yourself down before the client has even had a chance to see your rate. It’s for them to determine the value they are willing to pay — don’t give out free discounts.

This part might make you uncomfortable too, but I think it’s an important time to tell you that this rate you’ve just determined, is the lowest you should ever charge.

We’ll get into value based pricing in a minute — but if you’re charging less than this rate based on the utilisation figure you chose, you risk making a loss.

Something you might want to consider is actually further inflating your rate for short term work, so you give yourself some wiggle room to offer a better rate for longer term engagements.

Okie dokie, here we’re going to talk about the primary formats in which I’ve used the hourly rate above to actually charge for work.

I’m going to start with the shit one you should rarely ever do.

What I mean by this is literally where you track your hours for the work you do, you multiply it by your hourly rate, and you charge the client in arrears.

Why do I hate this model?

Enough said.

But when should you use it?

If you’re doing project based or retained work where the scope or block of hours are established, you should use this to capture out of scope stuff. But it should be small stuff and just there to ensure you don’t leave money on the table.

This one is fairly straightforward and I think the most common for things like Fractional workers — where they’re essentially performing a role vs delivering an outcome.

Essentially, you agree on a set of hours where you will be available to the client for a set list of things (the scope).

This format is good where there is a broad scope of work (which would be impossible to scope as a project), or they just want expertise available for a set hours and duration.

This model is nice because it gives you security of a set income and in my experience, most clients are comfortable with you spreading your hours across the week instead of doing dedicated days. Flexibility is nice.

One thing to be aware of is the inevitable “what if you do less hours in a week?” question.

To which you need to be prepared to say that this is the price of securing your expertise for the volume of work, and that you shouldn’t be punished for being efficient at your role. Ultimately you need to agree on a number of hours that feels right for the task at hand, and that should be fixed for both parties.

To help with this and other pricing based objections I’ve had, I’ve built a cheat sheet here that supporters can access.

This model is great for relatively routine pieces of work that you can easily scope and assign hours to. An example for me is doing a compensation philosophy. I know precisely what needs to be done, and I know roughly how many hours it's going to take to do it. There might be some wiggle room (which I account for), but it’s an otherwise fairly discrete piece of work, with fixed inputs and outputs.

Projects can be a little bit of a risk vs reward play, too, so let’s talk about how to price them.

You need to start by defining the key outcome (or deliverable) the client will have at the end of the piece of work.

From there you need to break down each sub-task or sub-deliverable you need to provide for that to be true. Sometimes this can get quite detailed, but you essentially want to keep drilling down until you’re confident you can quantify the hours it will take to deliver on it. And you want to be quite accurate here, because otherwise you risk undercharging for more complex work.

Once you’ve got this itemised, you can take the total hours it will take to deliver, and multiply it by your hourly rate.

One thing to consider adding is a bucket of hours for ‘project management time’. These are the inevitable emails, comms, supplier liaison and so on you didn’t plan for. For example, in my world, it regularly turns out all their employee data is trash and requires a significant overhaul. You don’t want to have to trot out the ‘out of scope’ card on a whim, and it’s guaranteed to happen, so just bake it into your hours. I tend to use 20%.

The cool thing about project based pricing here is that, if you estimate your hours correctly, you can start to become more efficient, which means — you guessed it — your hourly rate actually starts to go up over time.

What’s nice about this is that the value of the work you’re producing is the same (maybe even better), but you’ve started to ascertain what the work is worth vs the time it takes to deliver it.

And now this is the perfect segue to get into value based pricing.

When I first heard people talk about the idea of ‘value based pricing’, I was left with an impression that:

Turns out that all of that is totally untrue, and value based pricing is actually much more ethereal.

And as somebody who is fond of formula’s, I’ll admit that the uncertainty of nailing ‘value based’ pricing has been hard to swallow.

What I can undeniably say is true though, is that you have to have a starting point, and that starting point is the hourly rate you established earlier on.

This figure should be the lowest you’re prepared to go, and it sets the initial ‘value’ of the work you’re doing.

So how do we find what the upper range is? Let me share my experience.

When I started out, I targeted companies with 50 to 500 employees. My logic was that compensation starts to get painful at 50 people, and by 500 they still don’t have a dedicated compensation specialist, so they’d need me. Perfect.

What I’ve come to realise over time is that companies at the ~50-150 range, on average, find me too expensive. It’s where I lose most of my work because I’m not prepared to go lower than the price I set using the above method.

Put simply: My minimum rate > the price companies with 50-150 employees are prepared to pay me.

Conversely, I’ve worked with some companies that had >500 employees, and who paid me way more than my minimum rate. For them, it was more important to have the expertise to solve the problem, because it was a bigger problem for them.

And if you think about it, it makes a lot of sense. 

In an 800 person company (the size of this one), the impact of the work I do is more broadly felt. The payroll might be $60 million instead of $10 million. You’re helping them make decisions that affect a much larger cost. Not to mention you’ve got 800 people to worry about when it comes to comp (much more complex) compared to 150 (where you can pretty much talk to everyone individually and you know all their names). The impact is more broadly felt and matters more, so the stakes on getting it right are higher.

That’s value based pricing in action. The same work (essentially) is more valuable to some companies than others, based on criteria you need to define for your work.

For me, it’s headcount size. For you, it may be something else. Unfortunately the only real tip I can give you to nail the true value of your work, is to set your rate and start billing it.

There is no magic formula for determining the true value of our work to a client (that I know of, if you have the formula, please hit reply and let me know).

Now, I choose not to target companies >500 so my pricing can remain relatively static, but I know of other consultants that choose to segment their pricing based on criteria like headcount, because their work is way less complex at smaller sizes and means they’re still able to win it for the businesses that are more price sensitive.

There’s actually a classic video here I recently rewatched, that does a great job of explaining value based pricing, that I think kinda says the same thing.

As time goes on, and you get more experience, a few things will start to happen that inevitably mean you can move your pricing up.

The main one is that you have more leads than capacity to service them.

This is probably one of the nicest feelings ever, and I cannot tell you how weirdly good it feels to decline work on the basis of capacity, and the weird way it makes companies want you more. Something about scarcity no doubt.

One word of caution here: don’t do what I’ve occasionally done and take on more work than you can reasonably deliver. If you’re like me, you don’t compromise on quality (great), but you compromise on your work hours (bad). You’ll end up doing crazy stupid hours, and while the money is obviously good, you can’t sustain it forever. 

So do the (admittedly) uncomfortable thing, and let a lead go.

Now back to the point. Once you start to get more leads than you can service, you might consider doing one of two things:

Ok I’m being facetious, but the message is true. 

In a marketplace there is supply and demand. You’ve successfully managed to drive more demand than there is supply, and so it grants you the ability to move your prices up until you reach the point that those leads start to drop off.

I don’t have a magical formula here, this is as much a test as the value based thing. Suffice to say if clients are having to wait to work with you, they’d probably pay not to have to.

So pick a figure and get testing. Add 10% to your prices and see what happens. 

Other things you can consider is increasing prices for clients who aren’t as ideal as others. Maybe they’re in a slightly less relevant industry or something. Obviously my point above about value based pricing stands, too, and you should try charging more for bigger companies where the work you’re doing is ultimately more impactful/valuable to them.

See what they’ll say yes to and you’ll be surprised at how your sense of value starts to shift.

I’m not saying take advantage of the companies, but at the end of the day, they need the work done, and it’s on them to work out what it’s worth to them to work with you — not you.

The last piece of this puzzle is knowing what format to use when charging your clients the rate and model we’ve just discussed, so that it works for your cashflow and sufficiently incentivises them to move work forward.

One basic thing I’ve established up front is that I have maximum 14 day terms, and with the exception of hourly work, I don’t start work until a deposit hits my bank account.

I’ve read about too many people having long outstanding invoices with customers, and while I’ve only been blessed with 99% amazing experiences, why even leave yourself open to it if you don’t have to?

I also think 14 days is reasonable. It’s typically the lesser of 14 days or the date they want to start the work. 

This is a great incentive for them to pay you sooner, and I’ve never had pushback when a company has wanted 30 (or even 90 wtf) day terms. At the end of the day you’re a solopreneur and you gotta eat. Cashflow is necessary for this.

If hourly pricing happens, it’s best to invoice at the end of the week that the work is done. It’s tedious, yes (another reason why I dislike hourly work), but you don’t want to let it get out of hand and ending up a in long term credit arrangement with the company

Pretty straightforward. I invoice the month in advance, usually sending it 14 days before it’s meant to start (per the above).

I’ve tried two models here.

The first one is easy. 50% of the project value has to be in my account before I start working. The remainder is invoiced and received before any deliverables are handed over.

The problem with this approach is that if the project doesn’t complete, you’re out 50% of the value. Which brings me to the second method.

Here you divide the project value over a set of months it takes to deliver it, and the invoice is driven by the month, not the milestone.

As an example, if it’s 100k over five months, you charge 20k before starting, then 20k each month for four more months.

The benefit of this is the price is broken down a bit more for the client, and you’re invoicing them (i.e. getting paid) even if the project stalls on their end. 

This is a nice incentive for them to move things forward so they don’t let their cost overrun their deliverables.

Admittedly, pricing is still as much of a mystery to me as the day I started.

But I chuckle at the lack of confidence I used to have when charging for things now vs then, and I can comfortably send an invoice for $30k where previously I would second guess one for $3k. 

It’s all part of the journey.

If this article gives you anything, it’s hopefully a starting point for valuing your work, and the confidence to just put it out there and let the customer be the one to determine if it’s right for them.

What I think is more likely to happen, is that you’ll realise they value you more than you value yourself.

Matt ✌️