A great question came in yesterday about the “Vs. FTE” pitfall of hourly rates.

The ‘Vs. FTE’ pitfall pops up when a client tries to gut-check your proposed hourly rate by annualizing it and comparing it to their internal salaries.

(This pitfall was the 2nd ‘anti-example’ from the slide I used to get my first consulting client out of the hourly mindset.)

Again, I don’t advise an hourly pricing model for many reasons — this is one of them.

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Watch how this devolves:

Say you quote a client an hourly rate of $200/hr for a project.

Client: [knows the mental model of $xx/hr x 2000 hours to annualize it]

Client: “Whoa! That’s like paying someone a $400k salary! No one on my team makes even half that.”

Consultant: “That’s not exactly the right comparison. I’m only part-time, and I carry my own expenses, etc. etc.”

Client: I don’t know how I’d get approval for something that high. How flexible are you? Could you do $125?

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Notwithstanding that the Client’s knee-jerk counter negates their false comparison to an annualized salary, you’re now on the defensive:

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They’ve introduced intense downward rate pressure…

The tone of the conversation has become tense and adversarial…

You’ll probably come down a bit on your rate in good faith…

Each $ you shave off will be multiplied by every hour you bill…

And deduct straight out of your top and bottom line…

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And at the root of it...your pricing model has centered the conversation on cost.

Rather than the value you’re unlocking for them.

💡

-Wes