One of the more difficult parts of being a consultant is determining and negotiating your rate with a customer. Consulting is a lot different than product based sales because you can generally charge whatever you think you can get away with. The first few months of my consulting career, I was charging $67.50/hour. It took several iterations for me to find out what my time and expertise was worth, but eventually I did. My rate increased to $70 for my second client, $90 for the third, $120 for the fourth, and eventually peaked at $275/hour.

The key to making good money as a consultant is to know how to negotiate your rates. This is not a skill you generally learn in college. It takes time, practice, and even if you’re good at it, you don’t always get what you want.

A Recent Experience

Recently, I had the distinct “pleasure” of competing against another company for a relatively short contract. The initial engagement was only intended to be a week, but the potential for more work existed. How much more work had yet to be determined, and it was by no means guaranteed.

My competitor bidding for the same work was another consulting company based out of the Midwest. This particular customer is in downtown Boston and given that I’m only a short 45 minutes away (with no traffic, which NEVER happens), I figured that given the standard rates, I should have won hands down due to travel expenses for my competitor. It didn’t quite turn out that way.

My competitor lowballed the deal by nearly 1/3 and went so far as to include travel expenses. I knew for a fact that they were in trouble. They had been cutting employees left and right and earlier this year they let a consultant go just two weeks into an eight week engagement for a client. I understand the customer was pissed, but that’s not my business. The point is that I knew my competitor was desperate, but I couldn’t fathom how far they’d go to win a single week of work.

I was notified by the customer that I would need to match their low-ball rate via a 2 minute phone call in order to be selected to perform the work. I knew the customer had a preference for a local resource and that aside from my company (Moon River Consulting), there aren’t any other options in New England. Before I finish this story, let’s get into a few rules of negotiating.

Tip #1: Never be the first to mention a price

Standard practice for negotiating anything is to let the other person state a price point first. This establishes the minimum or maximum price. It also tells you whether or not you are in the right ballpark for whatever it is that you are negotiating over. For example, if you are going for a job interview and they ask you what the salary is that you are looking for, then you’re in a difficult position to be able to play this game. If you state a number that is too high, you’ll be disqualified. If your desired salary is too low, then again you’ll be disqualified because they will think you don’t have the required skills, regardless of whether you do or not.

Your goal is to land somewhere in the middle, and preferably at the high end of their price range. Unfortunately, they’re simply not going to tell you what that is unless you ask. If they were willing to pay $70k-$90k for the position and you only asked for $70k, chances are that you’ll end up with less because you set the maximum price by saying $70k.

In every case, someone has to mention the price first or everyone goes home. Companies will generally tell you what their expected range is up front in order to save time, but if they’re looking to save money, a lot of times they’ll simply say something like “salary commensurate with experience”. It’s garbage, but you have to live with it.

When negotiating a consulting rate, you will probably be asked flat out to name your price and there’s no way around it. When this happens, you are setting the maximum bar at which you will get paid and need to negotiate down from there. You might want to pad your number a bit to give you some room to negotiate. Don’t be afraid to pad this number if you’re sitting at the table doing a negotiation. If the negotiation is taking place via email, dodge the question and push for a time to talk. “It depends” is a classic consulting answer and it never ceases to amaze me how well this phrase applies to any given situation.

Tip #2: Never negotiate against yourself

If you’re the first to name a price, never let the other person tell you that the price is too high and ask you offer a lower price. This is known as bidding against yourself. There are two problems here. First, you are giving up ground in the negotiation without the other party doing the same. I’ve seen this happen and I’m sure I’ve been guilty of it myself. Second, you will unintentionally give up more ground than you intended to.

For instance, if you are negotiating a consulting rate, most companies will ask you flat out “What is your hourly/weekly rate?” and the expectation is that you have to tell them. Again, you can’t always avoid naming the price first, so this is pretty common. Just make sure you are in the same ballpark as others who offer similar services. But when they tell you that your rate is too high, ask them what they would be willing to pay or what they see as reasonable. If you say $100/hour, and then drop it to $90/hour, you’ve just given away $400/week and received nothing in return. You haven’t even established the bottom yet, so you have no idea if they’re willing to pay $50/hour or $10/hour.

The point is, don’t immediately counter a resistance to your rate with a lower rate, even if you’re desperate for work. In fact, especially if you’re desperate for work. People like a consultant who is confident in their rates, but able to justify them with a list of happy customers who paid that much. Just don’t cross the line into cocky. Prospective customers will walk you out the door and eventually, out of business.

Tip #3: Don’t negotiate your price until you are ready to

Through a long-time friend, I met a guy in Philadelphia several years ago who was interested in having some programming work done for his business. He didn’t want much more than 10-15 hours per week and was looking for what I thought was pretty basic PHP and mySQL work. My thinking was that it was just a meet-and-greet to establish a relationship and then we’d go from there to discuss the work that needed to be done and the rates for that work.

Maybe 5 minutes into the conversation, he asked me flat out what my rate was. Now, in keeping with Tip #1, I tried to dodge the question and was a bit vague, saying that it depended on what he needed done. He pushed hard telling me exactly what programming languages were to be used and how many hours of work each week he was willing to pay for, so I had little choice but to name a number and it was pretty close to our standard consulting rates in the small enterprise space. Immediately he jumped all over it and said it was too high and waited for my response. I certainly wasn’t going to negotiate against myself, so I asked him what he felt was reasonable. Of course he low-balled it at $25/hour, which we both knew was way too low.

I never knew what hit me. It couldn’t have been more than 5 minutes later when we “agreed” on $50/hour and he ended the meeting quickly, saying he had to get going. As I walked away with my friend, I shook my head wondering what the heck just happened. We hadn’t even reached the bar when I realized that $50/hour didn’t even cover my costs, let alone make me any money. In fact, in all my years of consulting I’d never charged as low as $50/hour. What was I thinking?

This is a nice lead in to the next tip, but I haven’t finished with this one so here’s the lesson. If you’re not ready to negotiate a price, don’t. This is really hard to do when someone jumps into negotiating your rate or calls on the phone unexpectedly because you get excited about landing more work and new business. Play it cool. You need to tell them that it’s not a good time and that you will need to reschedule the conversation. Sit down and give it some serious thought, then reschedule. Otherwise, you’re just not prepared or in the right state of mind to negotiate properly.

Tip #4: Establish the lowest rate you can accept and don’t budge

From the previous paragraph, I obviously made two mistakes at the same time. First, I wasn’t ready to negotiate. I had intended to feel out his personality and find his hot buttons, but when he immediately launched into negotiating, I got too jumpy and played the game. Bad idea. Second, I had given absolutely no thought to the minimum rate at which my developers could work for to break even. It didn’t even occur to me until after we’d concluded negotiations. By then, it was too late.

Decide for yourself what the lowest rate you can work for is, and don’t accept a penny less. Losing money is no way to stay in business.

Tip #5: Be ready to walk away if it’s not going to work out

Too many consultants make the mistake of reducing their rate further and further until their prospective customer accepts. You’ll never get ahead this way. If you do good work, people will hire you. You want your rate to increase over time, not decrease. If a customer only has a budget of $2,000 and can’t get a penny more for a week of work, you’d better be willing to work for just $50/hour. If not, you need to walk away and find another customer.

Any retailer will tell you that when you sell at a loss, you can’t make it up on volume. At least not without cross selling other items. It’s “Ok” to do something very short term to lose less money on a particular week or to land a longer term arrangement for more money, but don’t make a habit of it. If a job isn’t going to make ends meet for you, then you need to walk away and find one that does.

In the previous case of my abysmal Philadelphia negotiation, I eventually ended up walking away. There was no reasonable way to renegotiate the rate. For the money and anticipated length of the engagement, it just wasn’t worth the effort.

Back to my story…

After receiving my unexpected phone call regarding dropping my rate, I decided to delay things a bit. I could have agreed to the rate decrease immediately, as it was simply an offer to “match this one, and you win”. However, I wanted to think it over. The last thing I wanted to do was commit to the lower rate, only to end up in a bidding war and have my competitor cut his rate again, forcing me to match him at another lower rate.

I also thought about whether or not the customer was bluffing. After all, I had no proof that my competitor had indeed slashed his rates to the bone. Most retail stores operate with a policy of “guaranteed lowest price” by asking the consumer to show them a competitive advertisement listing a lower price for any product. A store will virtually never sell a product at a significant loss, for fear that customers will take them up on it. But the onus is on the customer to provide the proof that the competitor is offering a lower price.

This brings me to the last tip.

Tip #6: Take what a customer says about your competitors’ rates at face value

Was my customer bluffing about the rate of my competitor or no? Maybe, but I’ll never know. I basically had two options. I could either accept/deny the rate decrease, or I could ask for proof, trying to call his bluff.

Had I called his bluff, there were only two possible outcomes and neither was going to be good.

1) If he was unable to produce proof of the competitive rate, then I could probably have maintained the same rate. However, I would have also been calling him a liar. I somehow doubt that calling a customer a liar is going to encourage them to hire me.

2) If he was able to produce proof, then I still called him a liar because I didn’t believe what he originally told me.

This was a lose-lose situation if I were to attempt to call the bluff and I think he’d have gone with my competitor in either case. Ultimately, I accepted the lower rate because I wasn’t going to lose money on it and I knew it would hurt my competitor a lot more than it would hurt me.

Summary

Before you start any negotiation, make sure you know what you want, know what the minimum is that you’re going to accept, and be ready to walk away if you need to. If you’re not ready to negotiate, don’t. Ask for more time or to reschedule, citing a need to do some research or give some thought. Simply saying that you’re not prepared to discuss it is an honest way to handle the scenario. It tells the customer that you’re not brash and are willing to think things through. They may not want to wait, but this does a lot for your credibility as someone who understands how businesses operate.

Last of all, remember that negotiating your rate isn’t about you winning or losing. You need to ensure that you and your customer both get what you need. The key is to establish a long term relationship with your customers so they keep coming back for more consulting services when they need them. If you nail them to the wall during every negotiation, eventually they’re going to walk away and find someone else to work with

Good luck, and happy negotiating.

59 Comments

  1. Vlad on October 14, 2015 at 1:42 pm

    Hi Mike,

    I hope I am not coming late to the party. I work as a part-time freelance software developer on Upwork (formerly oDesk) and I always want to negotiate hourly rate payment instead of per-project payment, because it saves me for customer asking for unpredicted changes in the features, layout etc. So basically I get paid for every minute spent on the clients’ project and I am happy with that.
    When working for a fixed project price, the client always gets away when he changes his mind late in the project and asks me to change something for which I need to spend some hours and I end up with unbilled hours. On the other hand, if I give a cold response to the client: “Oh that wasn’t specified in the initial specification, you will need to pay extra for that or else I don’t do it” I might end up getting a bad review from the customer which on the long run will do much more damage to me.

    So when I try to negotiate hourly rate, the ultimate question from the client is: How many hours do you need to complete it? And clients would take that as a total cost, not a ballpark value. If you go over that, they will say that you are ripping them off because clients typically don’t understand what programming involves. On the other hand, if I were to tell upfront with certainty how many hours I would need for a project, I wouldn’t have bothered to negotiate hourly rates, because hourly_rate * hours = total_cost, right?

    Do you have any advice how can I convince clients that we should do the contract on hourly basis, not fixed price?



  2. Mike Taber on October 15, 2015 at 9:44 am

    The issue you face here is that you’re competing in a marketplace that is designed to push prices lower for the customer and commoditize software development. Price and value are not the same thing. The issue here is that concept not just heavily obscured by how this marketplace works, but intentionally shoved to the side. This attracts the wrong type of customer for what you want. What you’re essentially asking is how to change the perceptions of this market and I don’t think that you can do that. Fixed price bids are typically chosen by people who aren’t educated about the software development process enough to know how long something will take and how incentives are aligned. The other option is to simply not accept projects that are fixed price. Those tend to be the wrong types of customers to work with in general. You’ll work harder to get the business you do get, but it will be more enjoyable as a result.



  3. Lynne on October 21, 2015 at 7:40 pm

    Hi, just found your site. You write very well and share a lot of wisdom. I haven’t contracted in 18 years so I’m feeling rusty. I really appreciate your mathematics lesson on coming up with an appropriate hourly rate.

    Question is: If I strongly prefer working from home on contracts versus traveling, which would introduce extra costs and headaches on my part having my farm taken care of while I’m gone, is it ever advisable to discount my desired rate for that privilege?



  4. Mike Taber on October 22, 2015 at 8:45 am

    I think it’s relatively common to offer discounts or work for less to achieve circumstances that are preferable. But this isn’t about the money per se. It’s about what works for you. Make sure you’re still charging what you’re worth. But at the same time, there’s nothing wrong with sweetening the deal for the other party in an effort to get them to accept something that you find preferable.



  5. Paul Perez on December 8, 2015 at 1:11 am

    Mike, Thanks for the great article. I have re-entered the work force as a consultant after an 18 year stint as an employee. Your article was very enlightening and re-affirming. You gave great examples from your experience and I appreciate it. Best of luck to you. I look forward to exploring the rest of your blog. With Regards, Paul



  6. Thorsten on December 14, 2015 at 4:03 am

    Hello Mike:

    hey, thanks a lot for these really helpful, well-written and insightful tips !
    One question though: What about T&L expenses ?
    If you have an assingment out west or even overseas, this can add up quickly.
    Is this billed separately and reimbursed or do you go for an all-in hourly rate that includes all T&L ?

    Thanks !
    Thorsten



  7. Mike Taber on December 14, 2015 at 7:57 am

    This depends a lot on the customer. For the projects I’ve been in involved in, travel expenses are usually billed separately in addition to the consulting services. We used to be able to bill at a flat per-diem for meal expenses and everything else was at actual cost. Over the course of a few years, that went away, probably due to tax laws about what can and can’t be written off. For overseas engagements, this was the same but I also found that people were a lot less picky about receipts. I think this was because of the exchange rates. If a receipt says 18 Euro, depending on the exchange rate of the day, that might be within a specific range of USD. So long as the overall expenses were reasonable, I found they tended not to quibble over any of it, even if you claimed things for which you didn’t have a receipt.

    Separately, for travel it’s often difficult to justify charging for travel time but I suspect that in some countries, it would be common practice. In the US, even if you’re flying 4 hours each way to get to a customer, you can’t bill them for 8 hours of time. At least not in my experience.

    I’ve seen a few contracts where travel was billed as a fixed charge, but not many. It’s almost always at actual cost with a maximum. $1500/week is pretty standard, but I’ve seen it go substantially higher for large cities like New York. Up to $2500 or maybe even $3k would be expected in Manhattan but I’ve done work in Brooklyn and still only had a $1500/week budget which I was able to easily stay under.



  8. Cani on January 14, 2016 at 6:11 am

    Hello Mike,
    I am in a situation where my vendor wants to reduce the rate as it is not workingout for them. What are my options? Is this legal for them to do this in the middle of the contract?



  9. Mike Taber on January 14, 2016 at 8:59 am

    If you both agree to it, then it’s probably legal. I wouldn’t think it would be for them to simply drop the rate. If they tell you you have a choice of dropping the rate or ending the contract, that’s probably legal too. Most contracts have an “out” clause of some kind for the company. They tend to be very beneficial for the companies involved. But if you don’t agree to the changes, you can likely proceed business as usual or they’ll cancel the contract.

    Personally, I wouldn’t take a rate reduction for any reason in the middle of a contract. Their problems are not yours. That’s one of the main benefits of consulting. If it’s not working out for them, then a rate reduction isn’t going to change that. It sounds like an excuse to me to pay less.