How should an independent consultant determine his/her hourly rate?

If you are an independent consultant, how much should you charge for your time?

If you work for a professional services firm, the answer is very straightforward — the firm sets your rates. But as more & more professionals are consulting full- or part-time, they are seeking guidance for setting their rates independently. Whether or not you are a registered Zintro user, you can use the tool (free) to help you set your rates.

There are two primary methodologies to rate-setting. 1) Market-based and 2) Opportunity Cost-based.

1) Market-based — What price is the market prepared to pay?

The easiest way to estimate a market-based rate is to use the rate set by other consultants with similar skills in the same industry as comps.

2) Opportunity Cost-based — How much would I make if I did something else?

The second approach to setting your rate is Opportunity Cost-based. A simple way to calculate your opportunity cost per hour is to take your (most recent) annual income and divide it by the number of hours you work in a year (2,000 hour is 40 hrs/week for 50 weeks). So if you earn $125,000, your opportunity cost is $62.50. To convert this into a consulting rate, you should boost it by a factor in order to capture the fact that you will spend some hours marketing your services (on winning & losing engagements) and doing prep work and follow-up work for each engagement you do win. You also want to build in your “profit margin”. As a rule of thumb, I recommend doubling it (in this case $125 per hour) which translates to your annual income divided by 1,000.

So, if you (our battery engineer) make $125,000/year, then your Opportunity-Cost rate (per the Zintro calculator) is $135. So now we have three reasonable reference points. $100, $160, $135. The average of the three is $132. Perhaps a good starting point for you would be to set your rate to $130 per hour.

Of course, the true test of an optimal rate is when a) you can make a living with that rate and b) the market (i.e. multiple clients) are willing to pay you that rate. Hopefully, Zintro can help you land some new clients to prove out your rate!

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