Wednesday, May 27, 2009

Rates - What is right and what is wrong

The other day I mentioned that the economy was having an effect on the rates consultants can charge for products and services. In most cases, the effect is a negative one. This will be a good topic for today because the rates are always the most important part of a project.

Part of being a consultant and business owner is trying to figure out the right amount to charge clients. At DI, we have a range of rates that we charge depending on the services requested. In general, these rates rise with time as the company grows. I have also seen it go the other way though, as a new technology arrives the first few people can command very high rates for knowledge but then as more competition enters the market the rates are forced down.

I had an interesting exchange with a partner last week. This partner was talking about a potential project for a fairly low rate. The plus side was getting in a project at the ground floor with the potential to develop a long term relationship. The negative side was establishing a benchmark rate that is significantly lower than our existing work and likely severely limiting to any upside we might have with this client in the future. In speaking about this issue with one of my advisors, I called it the "GM" problem. The so-called problem with GM is that the car company is selling discounts instead of cars. When customers think of DI, I would prefer them to think of "quality work" and "excellent value" instead of "cheap". The advisor started laughing and agreed while pointing out that I drive a GM car.

This is a problem that doesn't have a cut-and-dried solution. In my head I have a rough formula that I follow but it's different for every situation.
The key point to remember is that rates are by and large a function of the economy, demand for the skill, supply for the skill, and any other factor (such as brand reputation, client sense of urgency). We can decide what the bottom line is and concentrate on projects over that line, and where your line is begins with you.

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