Your Business: Raising Your Prices
by David C Baker
This is the time of year when creative service firms begin thinking about their pricing for next year, and specifically whether to raise it. And if so, how to go about it. Here are a few thoughts for you to consider.
First, don't think of your hourly rate as a pricing tool, because it's really more of a positioning tool. It is just one of many inputs that feed how prospects/clients view your services, but it is a substantial one. How much you charge per hour is directly related to the perceived value of your services. In fact, the only time you should talk about your hourly rate is when you want to make a positioning statement or in answer to a direct question asked by a prospect/client. Otherwise don't talk about it.
Second, don't think of your hourly rate as a way to make money, because making money is more about utilization than pricing. To expand on this, there is absolutely no correlation between a firm's hourly rate and how much money they make, while there is a very direct correlation between how many hours they get paid for versus how many hours they spend on any given body of work. The latter distinction is about utilization or what we call "billable efficiency." If a given firm is not making enough money, they are often tempted first to raise their hourly rate, but that's going straight to second base without first rounding first base. First base is making sure that you're capturing all your tiAdvice Managing Your Marketing.ems me properly, no matter at what hourly rate you're billing it. Keep these issues separate, and fix your utilization first. If you've fixed that and still want to make more money, or if your current hourly rate is too low from a positioning standpoint, then think about raising your hourly rate.
Third, concentrate on being consultative rather than getting trapped in a transactional mentality. One example of this might be thinking in terms of hours in the first place. Sure, some of you are on open billing or retainers, but you're really trapped if you're billing by the hour. You can make a fair amount of money that way, but you can make more if you simply set a price that the client accepts or rejects. If they accept it, you then work on getting it done by spending a number of hours that is equal to or less than the hours you estimated that it would require. This usually requires a particular, focused expertise, which in turn allows for a process of solving client problems that is defined and proprietary.
Having embraced these points, suppose you want to adjust your hourly rate. Here are some suggestions on how to do it.
First, don't change it every year. Doing so is transactional, as if the rate of inflation is built into your hourly rate. It is not, and thinking that way will make you look more like a seller of commodities than advisory services. So look at it every year, but change it every three to five years.
Second, change it by a significant amount or don't bother (assuming that you don't have a lot of catching up to do in the first place). That means that typically you'll increase it by $10-30/hour or it's not worth the disruption.
Third, if that disruption would endanger some of your client relationships, just do it for prospects (i.e., new clients). There's only so much compromise that's prudent when trying to keep "legacy" clients happy, but some times it's a short-term solution you're willing to entertain as you bite your tongue and live with it until you have better choAdvice Managing Your Marketing.ems ices. (Remember that client turnover, if for the right reasons, is always your friend.)
Fourth, tell those who need to know a couple of months in advance, and then say no more about it when the time comes.
Fifth, position the price increase as an inevitable outcome from a careful look at your profitability targets. In other words, do an internal study that leads to (surprising) findings that virtually requires you to raise your rates to meet those targets. In other words, make it a considered move and not some gut reaction, and then blame the study that you wish you could argue with but cannot.
Sixth, try to provide choices to individual clients. Above all, that's what clients want. Even choosing between two bad options gives them the sense of control, which every client wants. There is no question about raising your rates, but the net effect to them can be minimized by giving them the option of doing less work for them, having them give you the necessary materials and information farther in advance, accepting fewer rounds of changes, etc.
Seventh, this is never as big a deal as you anticipate. The fear builds in your head, but you'll almost always be surprised at how much of a non-issue this is to clients if handled appropriately. Your best clients want you to make money.
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Article by David C Baker, ReCourse