Also establish rules for contacting you while you're at your day job. Stuff like that can get hairy real fast, so make sure there are clear boundaries on what is permissible and what isn't.
This cannot be overstated enough. A full-time employer expects your full attention to be on that job during normal work hours, and if a moonlighting gig takes your attention away, that's a quick ticket for a meeting with your boss and/or HR.
Now, to get into the nitty-gritty of it, there are two methods for assessing your fair billing rate, and both are important: The floor and the ceiling.
The floor how to judge your minimum billing rate. This is the rate you must charge in order for you to justify your time and the project you’re working on. First, you need to know what your mandatory annual income is, the money you must earn in order to be able to survive and reasonably thrive. As a consultant, there’s a good chance you will be a 1099 consultant as well, so you’ll need to budget between 30-50 percent extra for health insurance, self employment tax, etc. This is a little different in your case since this is a side job, of course.
For example, let’s say you have $40,000 in actual expenses for the year, including rent, food, etc. Your IRS tax bracket is 25 percent, so tack on an additional $10,000 for federal taxes and $5,000 for state and local taxes. Health insurance for a small business owner varies wildly from state to state, but call it $10,000 to be safe. You’re now at $65,000.
Once you have your mandatory annual income, divide that by 2,080, the number of work hours in a year. That’s your effective hourly In this example, your required hourly rate is $31.25/hour.
Now, here’s the part almost every consultant I’ve ever talked to gets wrong. They assume 100 percent utilization, meaning every hour they’re clocked into work, they’re doing billable work. That’s far, far, far from the truth. The reality is that consultants are lucky to get 2/3 utilization, and a better, safer estimate is 50 percent utilization. The other 50 percent of your time will be spent building your business. Thus, apply the appropriate multiplier based on what you think or know your utilization rate to be. If you’re just getting started out, assume 50 percent to start. That would mean your billable hourly rate would be $62.50/hour. That’s the floor.
Don’t accept any project under that rate unless there’s some massive leverage that comes with the project, like the opportunity to move up the food chain somehow. If you’re billing a project with a set rate, decide how many hours it will take you to accomplish it, multiply times your hourly rate, and be sure to specify in your contract that the project is restricted to X hours, with additional hourly charges for every hour after that point.
The ceiling, on the other hand, is where you make the big money, but it’s much harder to judge, much harder to assess without a lot of experience. The ceiling fundamentally is based on how much your work is worth to your client. For example, I've been asked to speak at a martech conference on the east coast next spring, and I'm a relatively popular speaker with a relatively large following. I know that I can put at least 50 butts in seats just by telling my fan base that I’ll be there. I know that the conference is charging $495 per ticket. Effectively, my value to the conference is $495 x 50, or $24,750. If I don’t speak, the conference may or may not fill those seats.
It’s reasonable, therefore, to ask for a percentage of that ticket fee as my pay. How much should I have asked for? Some conferences are offering up to 50 percent of the ticket price as a commission in their affiliate programs, so it’s reasonable to ask for that as my fee outright or in an affiliate program.
Now think about the contrast there. If I charged the floor rate of $62.50/hour, even if I billed for an entire day for the conference, I’d only make $500 at floor rate. If I got 50% of ticket under an affiliate program (assuming 50 seats at $495/seat), I’d get $12,375. That’s a really, really gigantic difference, and it’s why you should look to finding your ceiling as quickly as possible.
In order to develop a fair ceiling rate, you have to know and understand deeply the industries and companies you’re serving so that you know the economic value of the work you’re providing. As another example, say you know a particular method for looking at Google Analytics, a way that can instantly increase the ROI of a company by 30 percent. If you know the company’s industry and know that 30 percent more in their digital marketing ROI is worth X, you can justify charging a percentage of X and explaining how your pricing works.
A third example might be a graphic designer whose work increases website conversion from 2 percent to 5 percent. What does a 3 percent increase in conversion mean? Well, if the designer understands the companies he works with, he or she can say, "You’ll earn more with my design because my methods improve conversion from 2% to 5%, and that’s worth X to your company in additional revenue, thus my fee is a percentage of X’s value over the first year my design will be in operation as long as my design hits 5% conversion. After that first year, 100% of the increased value will be profit to you."
That’s the power of ceiling pricing – it goes far beyond day labor rates because you know what your work is worth, and once you explain that to your clients, chances are they’ll be okay with it. Why? Because it demonstrates your understanding of their business and the value you are providing, and you have a performance target built in. If your client reaches 5 percent website conversion, you get paid a large fee because you created the value they were seeking.
