What is the effective rate?

Effective rate measures the actual revenue earned per hour worked, accounting for discounts, write-offs, fixed-fee overruns, and non-billable project time. While a consultant's billing rate might be $250/hour, if the project includes a 10% volume discount and runs 15% over budget under a fixed-fee arrangement, the effective rate might be only $195/hour. Tracking the effective rate reveals actual pricing performance beyond stated rates.

Key characteristics

• Calculated as actual revenue collected divided by total hours worked

• Always equal to or lower than stated billing rates

• Accounts for discounts, write-offs, and scope overruns

• Tracked by project, client, service line, and consultant

• Key metric for evaluating pricing strategy effectiveness

• Target: maintain an effective rate within 85-95% of the stated billing rate

Why it matters for service firms

Effective rate reveals hidden pricing erosion. A firm with $300/hour billing rates but an effective rate of $240/hour (80%) loses 20% of its potential revenue to discounts and overruns. On $2M revenue, that's $500,000 in pricing leakage. Tracking the effective rate by client identifies chronically unprofitable relationships. By project type, it reveals which engagements consistently underperform. Firms that actively monitor and manage effective rates typically achieve 10-15% revenue improvement without adding clients or hours.

Real-world example

Summit Advisory analyzes effective rates across its portfolio. Stated average rate: $285/hour. Actual effective rate: $248/hour (87%). Drilling deeper: Enterprise clients show 94% effective rate ($268), mid-market shows 88% ($251), and startup clients show 72% ($205). Investigation reveals startups receive heavy discounts to win business, plus fixed-fee projects consistently overrun. The firm implements changes: eliminates discounts of more than 10% for startups, switches startup engagements to T&M with caps instead of fixed fees. Within 8 months, the startup's effective rate improves to 84% ($239), adding $68,000 annual revenue from existing clients.