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.

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?

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

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…

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