How to Start a Consulting Business: Determine Your Business Model
Take the next big step in launching or scaling your consulting business.
In my previous article How to Start a Consulting Business: Get Ready to Launch I detailed the need to get clear on who you want to help, and exactly how you’ll do so. Soon, we’ll answer the (hopefully) million-dollar questions: “How much should I charge?” When I first started my consulting business in 2015, nearly every prospect I talked to signed on to work with me. Why? Because I wasn’t charging enough. One client literally said, “I’ll gladly pay that rate”. Now, people shouldn’t hate paying you, but that was certainly a red flag on my end.
But before determining your consulting rate, you need to establish your business model. In his book, The New, New Thing, financial journalist Michael Lewis eloquently describes what a business model is: "All it really meant was how you planned to make money." I remember a few more details picked up while attending business school at the University at Buffalo, but that sounds about right.
As a consultant, you have a number of options. I’ll explain these while also discussing the pros and cons of each. Take your time with this. We’ll get to pricing soon, but you need to establish a solid business strategy first.
The time-based model
This one is pretty common and straightforward. Your rate and scope of work are determined at the outset. You can choose to have an hourly rate or a day rate, which is often referred to as a per diem.
You get paid for each hour of actual work. In the other models we’ll discuss, a fixed rate is established, no matter how long it takes you. It can sometimes be challenging to predict the amount of time it will take to address your client’s needs, so this model protects you from underbidding.
However, this also requires detailed record-keeping. At my previous job, I had to detail my work in 15-minute increments. This was tedious and time-consuming since I had to write it in a way that my clients would understand. Beyond that, clients may ask why something took so long. You may end up explaining why you had to research one thing or another before coming to a conclusion, which eats up even more of your time. Lastly, you may feel like you always need to be doing something. Otherwise, you’re not making money. This can easily make you feel anxious while also causing you to neglect your health and personal interests.
Another drawback is the challenges associated with projecting revenue. When doing hourly work your revenue is more likely to fluctuate since you don’t have locked-in agreements. This can result in you constantly feeling like you need to attract more business.
For example, let's say you want to make $100k/yr before taxes. If you charge $100/hr, you need to book 1,000 per year, or roughly 20 billable hours per week. That doesn't leave much time for prospecting, administrative work, eating lunch or taking care of yourself in general.
As you’ve probably guessed by now, I’m not a fan of hourly work. However, I do suggest offering this as an option for people who want your services on a one-off basis. I just wouldn’t plan on having the bulk of my revenue come from this model. If you choose to offer remote consulting at an hourly rate, consider using a platform like Yondo, which allows clients to book and pay for your time. This is the platform used for Entrepreneur’s Ask an Expert platform.
The project-based model
With a project-based model, you agree to perform a specific type of work for a predetermined amount of money. Before starting, the details of all deliverables will be agreed upon by both parties.
An advantage of this approach is that you can focus on providing value as opposed to watching the clock. You’ll also have more predictable income since this revenue is more or less locked in once the contract is signed. Let’s say your average project brings in $5,000. If you wanted to make $100,000 per year before taxes, you only need to obtain 20 clients per year or five per quarter.
One of the drawbacks is underestimating the amount of time it will take to complete a project. Years ago, a project I worked on took way longer than expected because the client couldn’t remember the password to one of their accounts, and the recovery email was associated with an intern who was no longer with the company. Apparently the intern was turned down for a job at this company so things got really awkward, really quick.
Another drawback is “scope creep”. This is when a client keeps adding more tasks that weren’t outlined in the original contract. This often happens unintentionally. As clients learn more about you and your work, they may discover add-ons that didn’t come to mind during the original scoping conversation. Over time, you’ll get better at protecting yourself from this by creating more detailed contracts. When scope creep does come up, just inform your client this would be an extra line item which comes with additional charges.
The retainer-based model
This involves providing ongoing or as-needed service over a set period of time. Unlike the project model, this approach doesn’t necessarily involve a specific deliverable.
I often work on a retainer model for clients who want to have access to me in case anything comes up. For example, a particularly challenging business opportunity, or a second set of eyes on a proposal. I’ve also received calls and texts that need an immediate answer. I’m happy to be that go-to resource but it would be challenging to individually charge for a text that took me 30 seconds to send.
For the client, a retainer model is almost like a safety net. At any given moment, they know there’s a knowledgeable resource available who already has background information on their company. For consultants, retainers provide a predictable source of income, which may be passive during slower periods. This allows you to focus more on business development and other areas of impact.
One drawback is not being able to charge as much as you would for a defined project. You may also feel awkward getting paid when you clearly haven’t done much that month. When this happens, resist the urge to manually adjust your fees based on how much work you’ve done during that time period. You may quickly end up charging hourly rates instead. Inversely, you’ll still have to keep an eye out for scope creep and make adjustments as needed. For example, determining what days/times you’re available to respond.
The consulting firm model
Another option is to go with a consulting firm model. In this situation, you hire freelancers or employees to complete work on your behalf. You still own the relationship with the client, but you have a team that handles some or all of the work.
Anna Vatuone, a personal branding strategist, helps entrepreneurs and executives build their brands. To properly achieve this goal, many of her clients need a website built for them. Anna initially provided this service as well before hiring and training an employee to complete this process. Although she still drives the strategy and content creation, she can leave the nuts and bolts work to a trusted professional. This allows her to spend more one on one time with her clients, while still meeting their needs.
The consulting firm model gives you a great deal of leverage. You can charge a client $2,000 for a project, then pay a team member $1,000 to complete a large portion of it. This model also allows you to expand the scope of your offering.
The downside, you need to make sure you’re still profitable after paying your employees. Imagine an unexpected hiccup occurs and the team member you were going to pay $1,000 to complete that task now needs $1,500? You’ll need to be highly skilled at project management to avoid these fiascos. Beyond that, your reputation is on the line so you want to make anyone representing you delivers on your promises. It can be challenging not to micromanage, which can have a negative impact on morale.
If you became an independent consultant to avoid the challenges associated with managing others, this may not be the right option for you.
Determine your business model. Research other professionals who are offering the same or similar service. This will also help you get a head start on determining your fee, which we’ll cover next week. Also, consider the model most aligned with your personal preferences and lifestyle. While a consulting firm model allows you to scale, you'll also need to spend more time with management and administrative-related duties. Take advantage of this opportunity to build your business around your life, as opposed to the other way around.
Need help with the pricing, packaging and promotion of your consulting business? Join Entrepreneur's online course "How to Start a Successful Consulting Business". You'll gain access to over 40 instructional videos, The Consulting Playbook and join live weekly Q&A calls. Learn more and sign up today!