Take the income you want, divide it by the hours you can realistically bill in a year, then add your costs and the time nobody pays you for. That gives you a floor. Know that number, and then stop pricing from it, because the formula that produces it is what caps most consulting businesses.
Work out your hourly floor once, treat it as a walk-away line, and price your work on outcomes.
The formula tells you what you can't go below, and it knows nothing about what your work is worth.
Count the hours you truly billed last quarter, not the hours you worked, and compare the two.
It's a recipe for overwork.
Leah Neaderthal, Smart Gets Paid
The formula is your target income divided by your billable hours, and I call it the bad math of entrepreneurship because it's the advice nearly everyone gets on day one. It runs in four steps:
Steps three and four are the ones consultants skip, and skipping them is why the rate comes out low. A rate that covers only your target salary assumes your business has no expenses and you never take a day off.
What the formula gives you is a floor: the number below which the work costs you money. That is worth knowing. It is a walk-away line, and it's not a price.
Far fewer than the hours you work, and the gap is where most rate calculations break. Consultants divide by something close to a full working year, then bill a fraction of it, and the rate that looked right on the spreadsheet turns out to be underwater.
Here is where the hours in a consulting week usually go:
| Where the time goes | Paid? |
|---|---|
| Delivering client work | Yes |
| Sales conversations and follow-up | No |
| Writing proposals and scoping | No |
| Marketing, content, relationships | No |
| Admin, invoicing, bookkeeping | No |
| Vacation, holidays, sick days | No |
Only the first row earns. A healthy consulting business still spends a large share of the week on the second and third rows, because that's the work that produces next quarter's clients. If you count those hours as billable when you set your rate, you've built a business that only works if you never sell anything.
Your rate caps you because it becomes the anchor every future price gets measured against. Once you write down a number, later decisions turn into small adjustments away from it, and the size of those adjustments stays small.
Tversky and Kahneman documented this in 1974, and one of their findings is precise about the version that happens here: anchoring occurs not only when someone hands you a starting number, but also when you arrive at it yourself through a partial computation.
Their subjects estimating the same quantity landed at medians of 25 and 45 depending on which arbitrary number they had seen, and paying people for accuracy didn't reduce the effect. Your hourly rate is a partial computation, and it anchors you.
There are only so many hours. Raising your rate by ten or twenty percent moves the ceiling; it doesn't remove it. And because the rate rewards hours, getting faster at the work reduces what you earn from it.
Price the outcome, never the input. Work out your floor once so you know your walk-away line, then set each engagement's fee against what solving that client's problem is worth to them.
In practice that means:
When a potential client asks for your hourly rate on a live call, you need an answer ready that neither invents a number nor dodges, and that moment has its own approach. The mechanics of building the fee itself sit in how value-based pricing works.
I get asked for a number constantly, and I understand why. You want someone to tell you that the right answer is X, so you can stop wondering whether you've been wrong this whole time. So here's the honest version: I know the formula, I can walk you through it, and I still won't build your business on it.
The bad math of entrepreneurship is a job with extra steps. It keeps the same trade you had in corporate, your time for their money, and it means that when you're not working, you're not earning. Make dinner for your kids, and the business stops.
What makes it worse for us specifically is that we then treat that number as a fact about our worth. It isn't a fact. It is the output of a division problem you did at your kitchen table in your first month of business, before you knew anything about what this work is worth to the people who buy it.
So work it out, write it down, and use it as the line you don't cross. Then go find out what the outcome is worth to your client, and price for that instead.
A blended rate is one average rate charged across everyone on a project, with no split between senior and junior time. It simplifies invoicing and it hides the mix, which usually helps you. It is still hourly billing, so it carries the same ceiling. Use it if a client's system demands hours, and don't mistake it for a move away from selling time.
Price the value of the outcome, and the outcome is often worth less to a smaller organization, so the number can legitimately be lower. What I wouldn't do is run a standing nonprofit discount off a commercial rate, because that prices your identity. Decide what the result is worth to that organization and set the fee there.
Track them for yourself, never for the invoice. Knowing how long an engagement really takes tells you whether a fee was right, which projects drain you, and where your scope keeps slipping. That is management information. The moment those hours appear in a client document, you've handed back the conversation about time you were trying to leave.
It is a signal worth reading. A client anchored on your rate before discussing the outcome is usually buying a pair of hands, and that engagement tends to stay small and get managed closely. Move the conversation to what they need to change and what it's worth. If it won't move, you've learned something useful early.