That's also true but I literally mean "you can specialize in having higher rates"; I'm not just saying "if you have higher rates you'll have free time to find more lucrative specialties". You can change nothing else about your practice but your bill rate and have a good chance of succeeding.
While I accept this is likely true, I still have a hard time incorporating it into my thinking.
I think I spent too much time as an employee, a relationship in which every increase in salary needs elaborate over-justification. Consulting isn't like that.
(Disclaimer: I've been an employee and a product startup founder but never a consultant.)
I think the key idea here is that you can change who you hang with in consulting. The world is a really big place, and it's filled with some people who are willing to pay a lot for the particular services you offer, and a lot of people who are not willing to pay a lot. Raising your rates just means that you will self-select for engagements with the people who are willing to pay a lot.
When you're an employee, your pool of opportunities is significantly more limited, at least unless you're willing to change jobs. So it's a lot harder to convince people to pay you more.
The key mindset shift you need is the ability to a.) put yourself out there and let yourself be found by the folks who are willing to pay a lot and b.) say no to the people who are not willing to pay a lot. (Also c.) get laughed at by folks who think it's ridiculous how much you're charging.) This is uncomfortable for a lot of people; it's still uncomfortable to me, which is why I'm not a consultant at this point, although it's also a very necessary skill for a startup founder and so I'll probably have to learn it and make peace with it anyway on my current trajectory.
I think the key difference (having done both) is that when you are consulting, a company is paying you (usually out of a pretty large budget) for a business outcome that they really, really want. When you are selling something that somebody with a lot of money really, really wants, you have a much easier time convincing them to pay you a lot of money. So your rate is really a function of those two things- perceived value of what you are delivering and how much they have to spend. It has nothing to do with what they pay other people who work there, etc.
When you apply to a job, they see you as a permanent cost center and not as an immediate way to grow their bottom line. In this case the negotiation changes to a large degree. I suppose it's possible to transfer the conversation during a salary negotiation so that you are selling based on the points above, but I think that's much easier said than done.
I think this constantly recurring point about raising rates is based on people who sell consulting services having a larger-than-necessary gap between what a company would pay for the outcome and what they are charging.
The limiting factor is how much value you add to their business. That can be a lot, eg. I could easily imagine patio11 adding $50K of value in a week's time by introducing a marketing campaign that sells $500K of product, or Matasano adding that much value by fixing a security hole that would cost more than $1M in lost goodwill.
One of my fiancee's B-school professors specializes in pricing theory. He can make several million dollars in one consulting engagement, because he tells companies where they should price their products to maximize revenue, and so he just needs to charge some fraction of ($new_revenue - $old_revenue), which is usually measured in millions.
