When you run your own business as a consultant, your income has the potential to vary wildly. Compared to a 9-5, this is a significant departure in how to run your financial life.

You can also find yourself in a situation where you are getting work, but it is of the $25-50 an hour variety, with no clear way out of the valley of low priced freelancing.

I’ve had two people contact me regarding the plan I outline in Tex-Mex Consulting to raise out of the valley into the $150+ hourly rate. Their chief complaint: it seemed like a fair bit of work, and would take time to come to fruition.

Yes, building a business paying you $200,000 a year isn’t easy.

No, there are no magic beans.

The good news: you don’t have to drop your income at any single step of the way. It’s all growth and increased revenue.

Most businesses have to wait months to see money. This is not true for consultants.

You’ll make money every step of the way. You can raise rates on every new prospect you get, with zero risk. Until you start hearing “Your rates are too high” on a frequent basis, your rates are too low.

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Let’s look at each segment of a typical raising-your-rates journey. Each of these segments assume a 1 person consultancy, so no outsourcing/subcontractor costs, and a 30% tax rate.

Segment 1: $50 an hour - $80,000 net
Segment 2: $75 an hour - $105,000 net
Segment 3: $100 an hour - $140,000 net
Segment 4: $125 an hour - $175,000 net
Segment 5: $150 an hour - $210,000 net
Segment 6: $7,500 a week ($250 effective rate)
Segment 7: $10,000 a week ($333 effective rate)

Segments 6 and 7 have maximum income in the $275,000 -> $360,000 range; your max net income is limited by the number of available gigs. I can easily fill out 160 hours a month at $150, but on average only book 2-3 weeks at $10,000 a week.

At full capacity, $150 an hour and 2.5 weeks at $10,000 a week end up at the approximately the same monthly income: $24,000. The trump card for weekly: the week or two off each month.

I can spend those weeks booking new gigs and working to increase my expertise and network. All things that will pay dividends in the future. Once you’re paid for the hour, all you’re left with is the cash.

How I use these high rates

Over the last 6 years, I have strategically raised my hourly rate from $65 an hour to a weekly rate of $10,000 (hourly effective rate $333). My goal with raising rates has always been twofold:

1. Work as little as possible to enable writing books, software, and contributing to open-source
2. Provide for the family, with the ability to work from home, enabling me to take part in caring for our youngest son (he has hemophilia).

You can obviously do whatever you like with your increased hourly rate. In a video interview for Tex-Mex Consulting, Steven R. Baker relayed a discovery of working all the time: he was working to much. “I realized when my son asked if we could go see a movie, I’d calculate how much that movie would cost me based on my hourly rate. I had to stop doing that.”

Dumb, stupid growth

You can move from the $50 segment to the $100 segment by simply raising your rates and talking to the clients about the benefits of your solution rather than the cost of it.

Strategic Growth

To graduate from $150 to the $10,000 range, you’ll need three things:

• a professional network
• a demonstrable expertise
• a niche which makes the expertise useful

In Tex-Mex Consulting, I teach networking, expertise, and nichification in a no-fluff, easy to read book. You should consider purchasing a copy and signing up for my free email course: 8 Ways to Change Your Freelancing Job into a Consulting Business.

Tex Mex Consulting is live and ready for purchases! Huzzah!

http://texmexconsulting.com/

I'm extremely excited to get the book out into your hands; I hope you love it as much I do! It's, without a doubt, the best thing I've ever created.

P.S. I've poured myself into this book over the last two months and want to see it spread as far as possible—would you mind sharing it on Twitter, Facebook, and Hacker News?

This isn't the "I'm looking for a technical cofounder" type of paying with equity.

This is the entrepreneur looking to get a good deal on the project. In their mind, you can cut your rate in half and take part of the company as equity. The numbers change, but the idea stays the same.

It's usually their money, and they want to get the most bang for their buck. It keeps your interest in the success of the project, and everyone on the same goal. And it's a terrible idea.

Let's imagine a $20,000 project, and you accept 50% of the payment in equity instead of cash. You're out, $10,000, for some amount of equity. Is it $10,000 of the future value of the company, after it's made it? Or is it $10,000 of the current value, which is completely unknown?

Maybe you say no to equity (smart), but say yes to 33% of all sales, much like a sales commission. So you get $3 of every $9 per month subscription.

Either way, you have absolutely no control in the decision and direction of the company. You're still a contractor, and the client can decide to not launch the product. Which has happened to me. Twice.

The client gets to the end, and discovers the project will take more of their time than their originally thought. A project doesn't run themselves, which you know, but the client may not have fully realized.

In this project, you worked for $10,000 and left $10,000 on the table. That money is gone and you'll never see it. 33% of 0 is still 0.

Take the cash, leave the equity.

How to say no, without saying no

In the same $20,000 project, with a $10,000 reduction, you can say no without saying no by asking the client for an audit to come up with the equity your $10,000 will take up.

"I'd like to be on the same page, with the same goals as you are. Unfortunately, we're in a bit of a pickle with this. I'm uncertain what the $10,000 of equity will be worth of the company; we can both agree it's likely worth way more today than $10,000 later.
"If you can produce a financial audit that values your company at a certain number, we'll be able to determine the amount of equity the $10,000 reduction provides me. Unfortunately, this transaction will likely take just about that much in legal fees to close. Is that something you'd like to pursue?

I made $1000 over the weekend writing 10 lines of code. Only, that's not how I see it, and it's certainly not how the client sees it.

From my perspective, there were the two hours hypothesing on the origin of the problem. There were the two versions of the fix, as well as the three days of monitoring (waiting) to see if my hypothesis on the problem matched reality. And of course the creation of a development environment with Vagrant which took way.too.long.

From the client's perspective, client had a problem -- the system was sending out duplicate emails on an invoice, minutes apart, and clients and customers were complaining. #paypal

This was a classic case of problem solving -- the client had a problem, I quoted a price to solve it, and I solved it for client.

"It’s going great. Haven’t received any duplicates yet."

If I had charged hourly, I would have charged approximately $600 (4 hours * $150). More interestingly, if the client cared about the lines of code for the fix, client would likely have said "This was 10 lines of code, should this cost about $100?" -- your response to this situation should be along the lines of the carpenter analogy.

Homeowner has a creaky floor, and hires a carpenter to fix it. Carpenter comes in and walks around the wooden floor, takes out one nail, and hammers it into the floor with a swift and sure strike.

Carpenter hands over an invoice for $100. Homeowner: "$100?!?! you only used 1 nail! That price is unfair!"

Carpenter rewrites the invoice: 1 Nail: $1
Knowing where to nail it: $99

Clients don't pay you to write code -- if they had it their way, there wouldn't be code, there wouldn't be a "you".

Then what do clients pay for?

Clients pay you to solve problems. Sometimes the problem is an existing system that doesn't work quite right. Well, most systems don't work perfectly, so let's restate: "Sometimes the problems in an existing system annoy the client so much that they want to take the risk of fixing the problem."

Sometimes the problem is an underperforming website. Sometimes they feel the need to have a presence on the app store. Sometimes they enter data into excel so often that an automated (and glorified) CRUD app could simplify their life.

Save the client money, or make the client money. If you rephrase your proposed solution in those terms, you are justifying your project by giving the client a return on their investment in you. (Also this is a most excellent way of increasing a client's stated budget). Talking in terms of investment and roi beats talking "costs" eight days a week.

And that, my dear reader, is the core concept in consulting. You may be expensive, but investing in your will provide your client a positive return. You're proven; you've done this before. So the risk is lower for 'You at $15,000' than an 'oDesk for $750'.

You versus the outsourcer

Prospect: "Why should I pay you $18000 for a website when I can get {my-cousin|odesk|india} to do it for $500?"

You've probably wondered about this question. Maybe even dreaded it. I know this guy does. So what is your response to the question: "why are you worth $17,500 more?"

"You could go with the cheapest option - many people try this once. What you'll get is a shoddy product, built by someone who knows just enough to charge you $500. If you get the project completed, which is a huge if, you'll have spent literally days of your own time managing the developer, making change request after change request. You'll have spent upwards of 40 hours of your own time trying to get the smallest change implemented and I know from experience that you will hate the process. Did I mention they only work when you're asleep causing days to melt away unless you provide constant, dedicated attention? And that you (and only you) will be responsible for testing the project?

"If you look forward to that, I wish you the best. When clients choose me, they are choosing the cadillac experience. You'll get your project delivered on time, it will meet your requirements, and you'll enjoy the experience. Project management, testing, design -- these are all things I take care of for you, rather than dumping on you. I solve problems, and I can knock this project out of the park."

Client stops paying; you have a contract. What do you do next? Since you're not a powerweight, can you do anything?

You've watched "F*ck You, Pay Me"^[1]; you've downloaded a contract or two, maybe even paid for the MSA Bundle^[2]. You might think the contract will save you in the event of $evilclient trying to stiff you on your last couple of invoices.

Let me tell you how it plays out: You're expecting that $8000 check any day now. You want to get that money. You NEED to get that money. Because #rent.

You've been putting off calling the client, hoping and pleading they pay. But they don't. You might even get the "Waiting on hearing from the boss" response from your contact at $evilclient, but no money.

Eventually you contact an attorney, because that's what Mike Monteiro Would Do. (WWMMD). The attorney tells you that $8000 is too few dollars to really go after and it would cost you about that in attorney's fees anyway. Further, even if you do get a judgement in a trial, a year from now, it's difficult to get paid. You: "WHAT!?!"

You've fallen into a legal sinkhole -- your outstanding invoice is too little to go after, but it means a hellalot to you. $8000 might be an entire month of revenue to you.

The story ends like so: you settling for $2000 and paying rent. Also, you'll be thinking about this situation years from now, wondering how you should have done it differently. Ask me how I know.

Contracts won't save you -- you need to have a workflow and system in place to prevent you from having your ass on the line. Protection comes in the way of risk mitigation of your most vital component in your business: cash.

From my consulting career, the absolute best way to make sure you get paid on time is to get paid beforehand. If you're not comfortable asking for that, try this:

1. Ask for being paid beforehand.
2. Failing #1, make sure you do not allow yourself to work 1 day past the client's deposit value.

Let's say your weekly invoice is $2000, and they paid a $4000 invoice, with net-15 on your invoices. The second the first invoice goes late, you should stop work. That means if you start March 1, on March 16th you must stop working^[1]. Any work from March 16th on is work for which you may not get paid.

In this situation, your first order of business is to send an email to the client -- you might need this later. You want to reference the invoice, include a copy of it, and be professionally courteous. Catch more flies with honey than you do with vinegar and all that. Some sample text you can email your client:

Invoice #345 for $2000 was due on 4/15/2015, and is still open. Would you update me on its status? I'll be pausing work on the project until the invoice is brought current. The fastest way to resume work on our project could be to either wire me the money today, or for me to courier you a pre-paid fedex envelope -- you can drop the check in fedex and I'll get started tomorrow when I receive the payment.

If your client has the money, this will work - you'll receive funds and you'll continue on a mutually beneficial working relationship. This action accomplishes several things:

1. You have let the client know that no work will continue until they pay.
2. You are a professional and are running this engagement.
3. You are giving the client a way to get you the money tomorrow (and give you a way to track and know about the payment). Waiting 6 days on a mailed check, with the client imploring you to start work because the check is in the mail, is for the birds.

If your client does not have the money: you stop the bleeding. It can only get worse -- you'll end up out tens of thousands instead of ones of thousands. I did not follow this advice, and kept working on a project with $18,000 outstanding for months. I did get the fairy-tale ending and received the money, but it devasted the working relationship between me and the startup.

Exceptions to the rule
If you're owed $50,000 or more - consult with an attorney; it's enough of a debt to start legal action over.

Consulting for the government (local/state/federal), is much less risky on a cashflow basis. Still, push for 60,70,80% upfront with some remainder on completion.

Large companies and universities: They most likely will pay late, but they'll pay. Also, they won't want to pay weekly. The same deposit calculations hold, just go with Monthly instead of weekly.

Small Claims - each state has a limit for what they call small claims court^[4]. In Texas, it's $5,000; check with a local attorney on how easy it is to collect judgements (actually get cash in hand), and what the process is like.

Sidebar: With the $18,000 above, the client was a startup and didn't have the money. Had to raise the money. Prefunded startups make for extraordinally risky clients -- get that money up front.

Next time, on "tex mex": Why you should never, ever, ever, take equity as part of your payment.

Final Note: if you do have a legal dispute, consult an attorney. These tips are my workflow for trying to prevent legal disputes by making sure you get your money first.

[1] 2011/03 Mike Monteiro | F*ck You. Pay Me.
[2] Obie Fernandex's MSA bundle - served me well for YEARS.
[3] This math only holds if you invoice on the monday of your week. If you invoice on Friday (after you do the work) your deposit amount should have been $6000: Your March 6th invoice wouldn't be due until March 21, and that's two full weeks of effort. Your $4000 deposit would only pay for the efforts of March 1 - March 15th, not the 16th-20th.
[4] Small Claims Court Limits for the 50 States

You're an employee right now, wondering about going Freelance (and then eventually starting a consultanty). If you're like most freelancers I know, you'll give your two week's notice, then look for some freelance clients and magically get paid in time to pay rent.

This is the worst possible way to take control of your career. You must consider and prioritize the three most important items about Freelancing and Consulting:

1. Cash Flow
2. Cash Flow
3. Cash Flow

Seriously. Right now, you get paid on the regular. It's likely not "enough" -- after all, companies pay you what is called your Replacement Cost. However, you get those moneys on the 1st and 15th and can pay rent. Giving that string of cashflows up without other cash to replace it is Risky.

Instead, I give you the method I used to move from Employee to Freelancer -- with two kids and a wife who stays home with the kids.

Part Time Gigs

There are many small companies that have a web application and want to make continual changes to said application, but cannot afford a full time developer. To them, having 20 hours of you is genius level awesome. Take this gig in addition to your current 40 hour work week. Invoice every other week.

20 hours at $75 an hour is only $6,000 per month. If that's enough for you, #partyon. If not, take a second 20 hour part time gig.

By the time the 3rd invoice comes in, you will likely be making more freelancing than employeeing. The decision is easy, happy, and totally easy to sell to the family.

80 hours a week?

Yeah, for 2 months max. That'll be tougher than normal, but it's doable. Note: this is only doable if you are capping your work at 40 hours a week. Which: do this no matter what.

Pricing your gig

You should try pricing the gig at $1500 a week, for up to 20 hours of software development. If the customer has the work, you get paid. If they don't, well, then you can work on backing up the production servers, or upgrading from Rails 2.3 to 3.0. There's always work.

How to find these gigs

Ask current consultants and freelancers if they have any clients they can't totally service any longer. This is totally a thing -- there are consultants who are now charging $150 an hour, and have a client who only pays $75 an hour. What is not profitable for them is a perfect stepping stone for you. If you don't know any freelancers, go to Meetups in the tech speciality you love.

Do Not Wait Until Unemployed to Start Freelancing

Don't wait. It only increases your risk -- which is the absolutely enemy of a successful freelancing and consulting career. See also: importance of cashflow.

Current Employer

Your current employer might have made you sign a contract prohibiting any outside freelancing deals. If so: find a new employer. These are stepping stones to your future. Best case: find a remote gig and see if you can handle working from home. It's good info to have.

The usual freelancer sales process, full of promises, tears, and lost productivity:

• Client contacts you via email or phone
• You spend a couple hours on the phone with client, talking about the work you'll do for him
• You'll probably do some research (hours++), and have another call and/or the worst: an in-person meeting (hours+++)
• You then spend a couple of hours coming up with an estimate
• You deliver to the client your rate, the estimated number of hours, and an invoice to get started
• You never hear back. ARGHHHHHH

That time ^[1] is lost time, it's never coming back. And, it's not billable. It's definitely enough to make you hate this game and never play again.

The problem? You were playing the client's game, and not your own. Many clients act like a vampire^[2], stealing your productivity and kicking the tires. The best solution for the kicking-tires-vampire problem: limit your time with non-paying clients.

Best way to limit your time with non-paying-clients? Ask clients to pay for something small before asking for the cadillac.

Initial Contact

Bringing a client on board starts in the initial contact, not after the sale. Your initial contact sets the tone of the process, as well as who is the driver. (hint: you want to be the driver).

The overriding goal of your sales process: I am the expert, I will run this show and solve your problems for you.

After the initial contact from a client, your next step is a 30 minute call to determine if they are the correct type of company for YOU to solve their problems. It is timeboxed to 30 minutes because you are important and do not have time to waste on clients you cannot make ecstatic.

Give 2 possible times to the client, a couple of days apart from each other. Usually, you would ask "what time works for you?" which has the downside of making you appear like you are not-important. More importantly, it makes the client look at their calendar and make a decision.

As a consultant, the only decision they'll need to make is "which of my awesome tiers of solutions should you choose from my super awesome proposal?". You will take care of the rest.

During the call, you'll ask them the following questions:

• How they got to you
• What problem they want to solve
• How they make money
• And "if I could wave my hands and make you happy, what would be different about your life?"

Workshop

From here, you book a fact gathering workshop. In your workshop, you'll produce several artifacts (deliverables):

1. A list of user stories documenting what users will accomplish on your application
2. Price per Feature you are comfortable estimating
3. Sketches and/or wireframes of the system

If the project is $50,000 or more, you should charge $5,000 a day for this. Seriously -- and $5,000 is not obsurd, it's consistent with the value you're providing for the client.

If it's under $50,000 you should spend about 1-2 hours on the workshop and likely nix the price for it.

The idea is a) get paid for creating proposals and b) get the customer to pay you for something small. You then deliver exceptional value. End game: client will pay $50,000 after paying $1500 and having a good experience.

Proposal

Create a three tier proposal based on your newly super awesome proposal process.

Send to the client, and offer to walk them through the proposal. Walking through the proposal is key, should be done in 30 minutes, and you can ask: "What is our next step? I have availability to sign a client and I want it to be you; I'm confident I can change your business for the better with this project."

The Sales Process, enumerated

1. Determine how you can calculate the return on investment for the client.
2. Determine the budget the client has in mind
3. Enumerate the main problem that caused the client to call you
4. Restate the value you'll bring to the client
5. Ask for the business
6. Profit

(notice all the numbers are filled in! No "..." here!)

[1] Total hours: 6-10 :(
[2] http://slash7.com/2006/12/22/vampires/

Most freelancers give a rate like $65 an hour. This means nothing to the client other than you're about a $85,000 employee. Yawn.

Instead, give them 3 options. The idea is to turn their choices from "yes/no" to "which option should I pick?". It's subtle, it changes the conversation, and it works fantastically.

Each option solves their problem, just in different ways, and with differentiators based on what they "want" not "need".

The end-goal for you is to sell the middle solution by bracketing it based on what's missing from the lower solution and the high price of the upper solution.

Bracket on Automation

How do you take your current estimate of effort and bracket into three different options?

1. Take 2 items out of your target solution and only put in the agency plan.
2. Add 2 things to enterprise that could be cool, but might not be needed. Automation is perfect for here.
3. Also add things like HIPAA, access logging, and an SLA to enterprise. Because enterprises.

Sample price differentiation

Support

Add support to your offering. List it as 20% of the plan, per year. It will include the ability to ask you questions, security upgrades, and fix bugs that you agree are your fault. Exclude new features.

Retainers

Include the ability to add small features and experiment with the app with a package. WPCurve enables this for Wordpress with huge, mega success. Allow the same for your bespoke application, and encourage the owner of the app to a) love it and b) pay on a frequent basis.

This should be the price of an employee * 60%, monthly.

$3500 is a popular price. Invoice yearly for big companies, monthly for small.

Proposal Software

There are many proposal systems out there, with some working as a lead system. You don't need all that noise. What you want is a system that allows you to create proposals easily, reducing you from 2 days to 2 hours (or fewer) on sending them out.

My favorite proposal system (at publication time) is Nusii. Nusii rules, gets out of your way, and encourages re-use of portfolio's.

Proposal Flow

• Who Client Is
• What Client's current problem set is
• How you can help the client
• Social Proof (other client's testimonials)
• Bootstrapped Option
• Funded Option (everything in bootstrapped plus x,y,z)
• Enterprise Option ($$$)
• Support
• Retainer

View Sample Proposal generated by Nusii.

Cutting Your Prices (Don't)

If your client only has $20,000 to spend, but wants a $30,000 application, the client has two choices. Neither of which include you reducing your rates.

Possibility Number 1: They cannot afford they app they want to build
Possibility Number 2: You should reduce $10,000 worth of effort from the job so they can afford it. (optimal).

The best application I've seen for the budgeting stage of an application is PlanScope. You're able to enter each line item, give it a price, and grant your client access to it. They'll then choose which items they want, and which lovely features they NEED are not needed at $5,500.

Reduce the scope to match the budget, rather than reduce your price to match the budget. Win, Win, Win.

The Book

I'm publishing a book on ways to position and focus your business to become a badass consultant. Fill out the form below and I'll email you quick wins to being awesome, win more projects, get more respect, and make more moneys.