When an entrepreneur starts a service-based business in a competitive market, he or she usually starts with prices lower than the mainstream competition. The small law firm charges less than the large one. A consultant working from home charges less than consulting firms. A personal trainer who meets clients at a gym charges less than one who owns a gym.
Slowly, but surely, the exceptional service providers, who offer a very high level of value to clients, create more business then they can handle. Thank you word of mouth! They have to make a choice. Expand quickly by recruiting an organization of people who can be billed at similarly low prices, or raise their rates! Plenty of entrepreneurs I’ve talked to do both – raise their rates and expand their businesses. They become the mid-sized law firm, consultancy or a gym owner.
During interviews with entrepreneurs (more than 100 so far), the service providers repeat the same message. About half of your time is billable; the other half is spent on marketing, sales, operations, administration, human resources, vendor management, etc. When calculating what your rates should be and can be, imagine billing out half of your working hours. Multiply that by the price per hour. Perhaps you cannot bill as much per hour in the beginning, but by providing great value, you can increase that rate over time.
There are ways to increase your prices without reducing your business.
1. Afraid of losing your existing clients? Keep earlier clients at the lower rates for a grace period – a month, a quarter, or a year. Tell them you are doing that because you appreciate their business. Explain that rates will rise by whatever date because costs are up. That includes your paycheck, new rental space, new employees and associated expenses, new insurance requirements, etc. This will soften the blow and because they like working with you, by the time rates go up, it will seem perfectly reasonable. Meanwhile, bring in your new clients in at your higher rates.
2) Create a new pricing structure. With long-term commitments, your rates are lower. Without them your rates go up.
3) Raise your rates, announce your new rates, and then run a promotion a month, a quarter or a year later if the new rates are affecting your business volume too much. Remember that you can always bring the rates back down to promote new sales.
4) Go after a new market that can pay your new rates. Going ‘up market’ may require retooling your business and extra time for selling to the new prospects. Plan ahead for this so that you can keep the existing base of customers until you move to a new market.
5) Offer more service or new products to demonstrate your company is worth the higher rates. You can do this by partnering with a related firm or expanding your own product line.
All the best!