There are some magic numbers that apply to the income potential for solo consultants. By magic I really mean universal economic factors that apply to the consulting profession, that are somewhat mystifying to most people.
The $100,000 Level
Many consultants and small business owners work long hours and manage to generate around $100,000 per year in revenue. For people that used to work as employees and have struck out on their own, this seems to be a nice income. The problem is that gross revenue is not the same as profit or cash in the bank, because every business must pay for expenses, taxes, etc. Revenue of $100,000 per year might mean taking home $50,000. If you are young and single, that may not be so bad, but is that why you went out on your own?
The $250,000 to $300,000 Level
This is the level that most successful consultants I know tend to hover around. These are people that have worked hard to establish a strong brand, develop a fairly regular stream of work, and have attained a certain level of success. Most consultants in this range live somewhat comfortably and can afford to own a nicer home, drive a decent car, and occasionally take nice vacations. But there is another side to the truth of this story that is all too common.
In order to generate revenue of $250,000 to $300,000 as a consultant, most people have to work 60 to 80 hours per week. And no matter how hard these people work, they are unlikely to move past the $300,000 level. Having become accustomed to living in the nicer home, driving the nicer car, taking the occasional nice vacation, working less than 60 to 80 hours a week becomes unlikely. Why? Basic math.
When billing by the hour, one must offer an hourly rate that is competitive and reasonable according to what buyers are willing to pay. For most consultants that I work with in the construction industry, $150 to $180 per hour are somewhat standard. Working 8 hours per day, 5 days per week, 50 weeks per year (2 weeks of vacation), works out to 2,000 hours per year. If a consultant produced 2,000 billable hours per year at a rate of $150 per hour, the receivables generated would work out to $300,000 per year. As any small business owner or consultant knows, to bill 40 hours per week means working another 20 to 40 hours per week on non-billable tasks essential to running the business. Things like generating new work, paying bills, sending out invoices, etc. For most consultants billing on an hourly basis, it is very difficult to move beyond 40 hours of billable work per week. In other words, unless your clients are willing to pay much more than $180 per hour, it is unlikely that you will be able to generate more than $300,000 per year. And to make that $300,000 per year, you’re giving up your entire life to work.
Those days of working as a regular employee don’t look so bad.
Moving Past the $300,000 Level
Due to mathematical realities, there is only one way to move past the $300,000 per year cap that most consultants face, without remaining a workaholic. Stop billing by the hour. Charge fees based on value instead. What is the value to your client for the work you are doing? The other factor is to increase your efficiency so that you can provide the same results, in less time. If you are charging a predetermined fixed price for a certain service that you provide, but can do the work in half the time of your competitors, you are essentially doubling your hourly rate. Consultants that I know that have taken this approach have gone from billing $1,200 – $1,440 per day ($150 – $180/hr X 8 hrs) to generating $3,000 per day.
This does two things. First, it means that the consultant has effectively increased their revenue without increasing their hourly rate or without costing more than competitors for similar services. That means that the client is going to be happy because they aren’t paying any more, but you are giving them results in less time than your competitors. Second, you can scale back the amount of time that you spend in your consulting practice. You can devote more time to marketing and building relationships, creating a synergistic effect – more effort on marketing results in more work and more revenue. You can also spend more time on research and development, improving your results and efficiency.
What do you do with that extra income? Plan for retirement. Most consultants that I know that are generating $100,000 to $300,000 per year in revenue don’t have adequate retirement funds. I’m no financial advisor, but if your cost of living eats up most of what’s left after paying taxes and expenses, it isn’t going to be easy to allocate enough to ensure a decent retirement. Therefore, many consultants I know are still going to be working 60 to 80 hours a week well into their late 60s.
How do you want to spend the rest of your life?