There is a delicate balance between the fee you need to charge for your products and services, and the fee that people are willing to pay for them. But with gasoline, heating, shipping, health care, and other costs rising, there comes a time when you must raise your rates in order to remain profitable.
Most people see their own costs going up, and won’t be surprised that you’re raising your fees, too. With proper communication about it, you should be able to raise your fees effortlessly.
Here are some tips on how to go about it:
- Don’t let fear and limiting beliefs stop you from raising your fees. If you hear yourself making excuses that you don’t know are true, it’s probably your fears and limiting beliefs raising their ugly head. Some of these include, “All my customers will leave if I raise my rates,” or “I’m not worth the new rate.”
- Have a clear idea of where your break-even point is, profit wise. No matter how tempting, you cannot make a loss on a sale. In fact, it’s not just about what you “need” to make, it should be about what you “want” to make, too.
- Base your fees on what the benefits and results of using your product or service are worth to your customer. For example, as a small business consultant and coach, I help people make more revenue and profit in their business. This has a value to self employed small business owner, and my fees are based on that value. If you can solve their problems, and if the problem is important enough to solve, then they’ll pay you an appropriate fee for that solution.
- Base your fees for services on your level of expertise. If your expertise level is high, you’ll be able to charge higher fees than someone just starting out.
- Check your competitors. Are there people out there, with your same skill level, charging more than you do?
- See if your product or service is a “commodity.” A commodity is a product or service that is the same, regardless of who is offering it. If you’re selling The Little Giant Ladder, it’s the same one that your competitors are selling. In commodity pricing, there’s not much room for differentiation, and customers will be looking for the lowest price. However, if your product or service is unique, or your skill set and experience are different and better than your competitors, then you can charge more. You’d pay more for Oprah to teach you how to create your own TV show empire than someone you’ve never heard of. Bargain basement prices often scare off potential customers, especially if they’re buying a unique product or service. Use commodity pricing wisely and sparingly.
- Decide in advance whether you’ll raise fees across the board, or only for new customers. Even if you only raise fees for new customers, there may come a time when existing customers will need to have their rates increased, too.
- Do the 80/20 evaluation. Find the 20% of your customers who bring you the least profit and raise their rates. This may sound harsh, but you’re in business to make a profit and you can’t keep an unprofitable client (or one you don’t enjoy working with).
- If you will be raising your fees with existing customers, it’s a good idea to call them or write a letter, explaining that the fees will be going up to the new rate, and giving them a date when this will happen. I recommend giving them at least a two month notice. Will you lose some customers who aren’t willing to pay the higher rate? Yes. But if you do, then you need to ask yourself, “Why hasn’t this customer found value in what I’m offering so that the new rate was still acceptable to them?”
How to determine your new rate
Unfortunately, there’s no one-size-fits-all formula. Instead, I suggest triangulating on a rate that seems fair. Look at several different numbers and then decide. Here are four suggestions.
First, make a ballpark guess of what you think your new rate should be. For example, if your rate is now $150 an hour, what do you think is a logical next step? $175? $165? Jot it down.
Second, calculate a percentage increase. The amount might be 3% or 5% annually. Or maybe you need to make up for two or three years without a rate increase, and a 10% or 15% increase seems appropriate. Do the math a few different ways and see how these numbers play out. In my example of $150 hourly, a 5% annual increase works out to $157.50 for year one, $165 for year two, and $172.50 for year three.
Third, do some market-rate benchmarking to learn what other consultants are charging, or what clients are paying. Try doing a quick survey of similar consultants you know (maybe ask them to select from list of price ranges). Or search the internet: for example, “typical consultant rate for organizational design in San Francisco.” Alternatively, if you worked through an agency you can guess what the client paid for your services by adding 30% to 40% to whatever rate you were paid.
Last, compare to other related services. As a consultant and solopreneur, how does your rate measure up against other professional services like executive coaching or accounting? (I recently talked to my acupuncturist about raising his rates and mentioned that he charges less per hour than a massage therapist even though he’s much more effective.)
Once you have the numbers, it’s easier to raise your rate with conviction because your new rate is based on research and not just pulled out of thin air.
Who will be affected?
Do you want to raise your rate for all clients or just new clients? The latter option is easier because no explanation is required; just start quoting your new rate.
On the other hand, if you tend to do a lot of repeat business with a handful of existing clients, raising your rates only for new clients won’t create much additional income.
If you’re uncomfortable raising rates for existing clients, consider taking a longer-term hybrid approach in which you quote the higher rate for new clients. Later, tell existing clients that you’ve been steadily raising your rate on new projects but were hesitant to charge them more because you appreciate working with them so much; however, now you run the risk of subconsciously favoring the higher-paying clients.
Or another idea is to offer them an alternative. For example, for larger or longer-term projects (say, at least six months or over a certain dollar amount) your current rate will still apply.
I think it’s probably easier to just do it all at once, starting with your next new contract. (Don’t try to renegotiate your rate during an existing project.)
When to do it and how
You should probably do it now. You’ve read this far so I’m guessing on some level you want to go for it. Here are my suggestions.
1. Get right to the point. Price increases are a normal part of doing business. Burying your message in a bunch of small talk will only undermine your professionalism. Remember, sometimes in business you’re not here to be liked, you’re here to get a job done. This is one of those times.
2. Make it a policy. Perhaps the most important part of effectively raising your rate is to commit to doing it. I also recommend making it your policy. Literally create a document titled “Rate Policy” and write down what rates you charge for what services. Or if you like to quote a price range (a trick I highly recommend), write down the variables that affect whether you quote the low end or high end. Be sure to include your “walkaway rate” or lowest acceptable rate. Your policy should be short, maybe half a page. No one is likely to see the policy except you, but having it will enable you to say to clients, “It’s my policy.” These are magic words that somehow make clients more reluctant to negotiate, or for you to cheat yourself.
3. Set an effective date. This serves as a line in the sand, both for you and the client. This is also why the end of the year is a good time to do this. Effective Jan. 1 sounds less arbitrary than effective March 1. If you have a contract that extends into the new year, your policy should be for all new contracts after your effective date. (Note: Another logical time is on your company’s anniversary; if you don’t know what day your business was founded, make one up — maybe the date you opened your business bank account or you signed your first contract.)
4. Remind them of your value and how you value the relationship. Reference the length of your relationship or any recent results from your work.
5. Give your clients ample notice. As with any change, it’s best to get people used to the idea first. Depending on the degree of change, you’ll want to give your clients one or two notices. Here are some sample snippets you can adapt.
Subject: New rate policy for 2019
As 2018 comes to a close, I’ve been reviewing the books and clarifying my business goals for next year. As a result, in 2019 my consulting rate for new projects will be increasing to $175/hour. This rate will only apply to new projects, so our existing contract won’t be affected, but I want to give you a heads-up now.
Of course, rate increases are inevitable, particularly in this healthy economy. I value the relationship we’ve developed over the last two years, and certainly want to continue being of service. Please let me know if you have any questions or concerns.
If you’re not going to raise rates at the beginning of the year, start dropping hints to manage expectations. The best time is right after a “win” or other milestone. “Yes, I thought the meeting went exceptionally well too! Let me know how else I can help. By the way, I’m planning to raise my rates in the fall, but we can discuss that later.”
6. Most importantly, be confident. Deliver the message with confidence so your client knows you’re serious. Running the numbers to triangulate on your new rate should strengthen your psychological backbone. Also reflect on all the ways you’ve helped your clients and the value you provide. Whatever you do, don’t apologize. This is a normal part of running a business; why apologize for being a sensible business owner?
Clearly, raising your rate doesn’t need to be awkward or intimidating. It’s just takes some planning. If you want to grow your business or meet your financial goals, charge what you’re worth!