Pricing. Ok- don’t run away yet. I know it’s tough to pick the right price. I’ve been trying to get it perfect for nigh 40 years- sometimes it’s a little high, sometimes it’s a little low…and, no, Goldilocks has no better choices, either.
And, now, we have another problem. The economy sucks. But our costs are not staying still. So our margins (read profits) are disappearing- drip by drip, as the price of utilities increase, as the price of paper goes up… Our first instinct is to raise our rates.
And, how do you think your clients/customers are going to react? Therein lies the real crux of the matter. If you have the only ‘HoozeeWatzee’ on the market, then you are OK. If you are selling coffee, then, it’s not so good. And, if you provide services, then you may be somewhere in the middle. Let’s use that as our choice- and pick two different professions within that choice to determine the effects: A lawyer and a virtual assistant.
A lawyer’s rates range from $ 350 to 600 an hour (really, they are higher, but I am picking smaller city lawyers). A virtual assistant charges from $ 50 to 200 an hour. Going up $ 10 on the lawyer’s rates is not much- but for the VA, well, that could be a steep increase.
We also have to decide- do we just charge new clients more? Or everyone? That $ 10 an hour for the lawyer, who probably sees his client 250 hours a year (at best) costs the client $ 2500 more. For a total annual cost of $ 102,500. The VA may also see the client for 250 hours, which means that the annual costs are now 10% higher or so.
And, there’s a third case, like ours, where we have three kinds of clients. We see some clients 10 hours a year. Others, 250 hours, and about ¼ of them, 1500 hours a year. Each of them will have a different reaction to a price increase. All of them will see an increase of 5-10%. But, in dollar levels, we are talking about $ 100 more on ONE bill for the two lower interaction clients and $ 1000 on ONE bill for the larger clients. That is going to be noticeable. Which means we need to plan this change carefully.
Simply put, we would recommend the immediate institution of a rate increase for all new clients. And, we can expect to lose one potential new client for each 10 we see. The trick is to keep that rebuttal low and infrequent, so the total dollar volume of our business won’t change. Better yet is to make sure we seek a higher number of potential clients, to insure that our gross volume increases. Or, to see clients who need more of our services, which also will increase our volume.
The existing clients will be notified that we are going to raise our rates in the next 4 to 12 months. We know we may lose some of them- or be retained for fewer hours. But, by telling them well in advance, they can plan for our proposed increase. And, we can show them – each and every day- why we are worth more than they’ve been paying us. We’ll insert a notice on each bill, reminding them an increase is coming. And, our reports or meetings will let us highlight what we provide them (hopefully, that no one else can). And, we’ll have time to plan and manage our business, as well.
How would you do it?
It sounds like you have a good plan for increasing your prices, Roy. You are informing your clients well in advance of the price increase. They will then be prepared to pay the additional fees or look elsewhere for a service provider.
People don’t like surprises. I think it is very good that you are announcing your price increase months in advance.
Janette:
Plans, shmans… We are still working out the details. And working hard to insure that we lose NO clients over this issue.
We kept hoping that the 535 dolts about 10 miles away would stop putzing around and develop a useful plan to help our country, instead of holding the economy hostage, so that we could avoid raising our prices. Obviously, our hope did not materialize. Now, back to Plan A….
Roy
Hi Roy,
I don’t plan on any rate increase at the moment but I sure see where you are coming from. When Italy switched from Lira to Euro, everyone took the opportunity to round it up and increase prices. Those who suffered were those on a fixed income and today many people find it difficult to make ends me.
As a company or service provider, they can pass this increase to the end-user who at the end bears the brunt of it all. What do you think?
Diana:
It always seems easier for someone else to raise prices- because it’s not your business volume that is affected.
We have to deal with this issue for our clients I am the CFO for a law firm. They had to raise rates last year, because many of the lawyers are now seasoned professionals (they have 7 or more years under their belt). The biotech firm’s insurance doubled and their employees were being raided- so we needed to up their salaries, too, or we would lose the best and the brightest.
It’s not an easy sell. Because the customers/clients for each of our clients are feeling the downturn, and getting hit with cost pressures, too. But something has to give.
We have not raised our rates in four years. We were able to hold firm, since we pass along direct costs (airfare, hotels, meals when traveling for clients, and the like). We do NOT charge for copies, faxes, and the like. However, our paper and printing costs are up, utilities are up 20%, our health care costs are up 15%, our insurance is up by more than 20%… ok, you get the idea.
Our employees have had raises over the past four years- maybe not as much as they’d like, but better than most. Our officers have had no increases in five years.
We are going to raise our rates, too.
C’est la vie…and, we will prepare our clients for this event shortly.
Roy
One thing I think business needs to stop confusing is value and price. We have gotten so price conscious that if the price is not perfect, we lose clients or fail to attract them. Everyone knows prices have gone up so why not just do what every telco and power company does and just tell our clients. I sometimes think that most of the problem is in our own heads, especially if we are a small business. If the service is good, we pay. If the service is bad we whinge and maybe leave or seek another company but usually we just pay if we value what we receive.
Roberta:
You SAID it- and said it well.
It’s among the prime reasons why it is easier to advise others on pricing than ourselves. The understanding of the value our clients impart to their customers/clients is clear. We don’t temper it with our self-doubt about value. But, for our own pricing- well, now we have mountains of doubt.
Thanks for your addition!
Roy
Roy, aloha. Raising prices is never fun for anyone. You can look at the numbers, adjust, do a lof ot “what ifs” and then, as you say, sometimes you are too high others too low.
The planning that you do and the approach that you take with your clients will, hopefully, mitigate some of the “pain” of the increase.
Your chart is an excellent way to help people figure out what to when it is time to raise prices.
Thx so much, Roy, for sharing your thought process with us. Until next time, aloha. Janet
Janet:
I hope I also made it clear that it is SO much easier to advise others on their pricing than to shepherd one’s prices to the fore…
The emotional attachment is the biggest difference between setting MY prices and YOUR prices.
(I have written about pricing – the art and science of it- for years. Would that it be more science than art… http://www.mondaq.com/unitedstates/article.asp?articleid=46532&searchresults=1 )
Roy
To tell you the truth Roy whenever I get a notice about the price going up, especially with health insurance, I just am not a happy camper! But I have to agree with you, at least then I am made aware of it and can and do plan for it.
Appreciate you spending time explaining your specific technique. I think the key is the value you bring to your client so any increase really doesn’t matter to them because they want to come back to you because of you!
Lynn- we all cringe with price increases- getting them or giving them. And, yes, the health insurance ones are worse, because if you are solo insured or a small firm, there is neither rhyme nor reason to these increases (other than, “Yes, we can!”).
And, you’re right- we have to make things work as well as possible, so they come back – and tell their friends about us!
Roy
You’ve addressed a topic that can be challenging, but I agree with Roberta. A lot of the concern, especially for small business owners, is in our head. Here again F.E.A.R (False Evidence Appearing Real) can play a part.
On one hand, we’re afraid that if we increase our prices we could lose some of our clients/customers. On the other hand, our ideal clients are likely facing the same decisions so they may expect this. If we’re providing value and quality customer satisfaction, it will make it easier for our clients and customers to accept increase. It’s never easy to tell clients we’re raising prices, but doing it strategically can help to keep it smoother.
Yvonne- you’ve got it right. As I wrote in an answer to your blog today:
It’s relatively easy with product sales. Youcan detail the quality of each item, prove its worth and value compared to any potential competitor.But, services are much more intangible. You can’t prove a service I will deliver in the future is better than anything they can find- because it’s not here yet. The best you can do is point to a track record…
Hence, the F.E.A.R. !
Roy
Ooh! I am so inexperienced with this, but I really loved reading about your case and reading others’ comments on this! I guess this is why it’s so important to have various clients. =P I’d be scared to increase my rates with so few clients!
Samantha:
First, I am so sorry this reply is delayed. When replying last night, my browser crashed after I hit reply. And, I had to run diagnostics- and restore the 17 windows that I had opened. By then it was 3:15 AM- and I was going to sleep.
Second- the answer (I hope this one is as good as my first 🙂 )
Let’s even assume you have 1 client. Your costs went up 30%. Everyone’s costs went up at least 20% (i.e., 2/3 of yours)- or at lest their prices did (since you can’t be sure of their costs).
Monitor your client- if it raised prices- why would YOU worry about raising yours? The client understands the issues, you can explain the facts above- and remind the client that your pressures are no less critical than his…
Roy
It’s very easy to find out any matter on web as compared to books, as I found this piece of writing at this website.
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Misty…
It may be easy to find anything on the web- but it’s hard to find useful, truthful, and data-laden posts on the web.
That’s what I try to insure…
Roy