[bdunn]

Justifying your costs by basing what you charge against the costs of a similar employee is a good start, and in my experience it's how most of us start (the old "divide by 2000" trick). I like that Andy makes note that you need to include overhead (prospecting, writing proposals, ...), which a lot of new freelancers tend to miss.

However, I think the big takeaway is realizing that the formula presented establishes a minimum threshold. It shouldn't be used to figure out what you charge. My rates are way north of what the a developer/marketer would command on the open market, but I don't contextualize my costs against the equivalent costs of an employee; instead, I anchor my costs against the upside that a successful delivery of a project would yield for my client.

The single best way to substantially make more money consulting is to stop selling commodity services (web design, Ruby programming, whatever), and to truly consult. Provide your clients with a way to bridge the problem they face with the solution they desire, and charge accordingly.

[andy_adams]

Bingo. Thanks, Brennan. Part of the epiphany I had was "wow, I did a lot more than programming on that project". I managed it, taught other developers, and "consulted" quite a bit. I also read your book right before I had this moment. I hadn't quite bought into it yet, but this was the first step.

[dragos2]

Can you give an actual example of some problem that one of your clients had and how did you consult him/her?

[bdunn]

Sure. So I had a client who wanted us to rewrite their 10 year old MS Access app as a web app.

The engineer in me would have immediately jumped into "OK, how do I migrate this database into Rails and recreate the functionality and UI of this app?" I would have priced the going rate for web development, and tried to gauge how long it would take to complete.

The business owner in me realized that this app is critical to their business. It's the tool they use to manage and close sales, and about 20ish people use it all day, every day. I also knew that the CEO was currently the maintainer of the app, as it was started when the company was a home business and the owner picked up a "Learn MS Access in 21 Days" book.

Knowing this, I went to work learning how I could not only modernize the product by making it web based, but I wanted to leverage my experience in usability to optimize how their team uses the app. How can we not just rewrite the app, but also optimize it? Is there a clear path to adding an hour or so a day of additional productivity per employee, and what would 100 hours of combined additional productivity a week mean (financially) for the business? And how much better would it be if the CEO of this small company wasn't needing to maintain the app himself, but could focus on what he does best — growing his company?

What I sold wasn't software or a rewrite. I ended up selling a better tomorrow for his business, and a more profitable tomorrow. This "decommoditized" what I was doing, and while he paid me a premium, he received a much better product at the end of the day.

[hyperliner]

Also, I think there is a lot of focus on pricing (fair, it was the point of the article). But you simply need to back it up with what is your differentiator. It's just like any product: you need to be articulate as to why you cost your rate, and also have an idea of the value of your work to customers (different customers value the same work differently).

So, know what makes you different, find the customers that value that work more, and set your price according to that.

[dkrich]

In my experience, differentiating from competition wasn't really a factor in how much I charged or how much I made. For a lot of businesses that would hire a solo consultant, there is no consideration of the competition.

Most of the businesses that I've dealt with are intimately familiar with the problem/objective, but really don't have much knowledge of what is required to get there. This is where the consulting part comes into play. Many times it's been as simple as "let's talk about what you're trying to accomplish here" and from that I am able to formulate a solution in my mind of how that can be solved with custom software (or in some cases, an out of the box tool). I make the recommendation, and boom, a sale is made.

This is where making the business case for what the client stands to make comes into play and why what another developer might charge is highly irrelevant. If you can convince a business owner that he'll make $100,000 with your solution, convincing him to pay you $30,000 is not too difficult, regardless of whether he could technically find a high-school student who would do it for $15/hour.

To me, the key word is trust. Once you prove that you have good ideas and know how to execute on them, making sales is really more about just repeating the process than undercutting the competition. It goes without saying that you must deliver, though.

[rhizome]

I am currently struggling with a method to raise my rate with a current client and your comment has crystallized the problem I've been having in writing the email, but not the way you think.

Another way of differentiation is to take stock of what you provide over and above basic work. That is, not to differentiate from any perceived competitors, but from what the client thinks you're doing (their perception of your role to them). If they think you're just doing web development, but also rely on or defer to you for system administration, UX/design, content, and/or hosting decisions, et al, those are all things that comprise your value. This is a roundabout of repeating tptacek's elements-of-value lists linked elsewhere in these threads.

[logicallee]

Sounds like, "Actually I take the idea of a 'rate' off the table, by becoming an equity cofounder with a cliff, and leveraging my connections at fortune 500 companies to sell the entire company for $60 million. This nets me about $20M based on the way I structure my contract, and takes approximately 800 days of work, so that works out to about $25,000 per day or something like $3125 per hour. Really, if the business is in a big market with good growth and good margins and some kind of proprietary lock-in or moat, $60M is quite a reasonable figure for many Fortune 500 companies to acquire for. Then I just make whatever needs to happen for that to happen, happen."

Well, good for you - but I don't think it has much to do with freelance web development! (the 'commodity' you mention).

In particular, what makes you think OP could do the same?

[bdunn]

It has everything to do with freelance web development, because I (a 1099'd freelancer) am still doing web development. I've just come to realize that clients don't pay me for lines of code, therefore I don't sell lines of code :-)

Figure out WHY a project's being commissioned and then propose what your clients actually care about (hint: not code), vs. doing the usual "here's a proposal with a bunch of technical line items, a quote, timeline, and a signature field"