3 Reasons That Justify Raising Your Rates
By Andrew Harrover, CEO, Matrix Computer Consulting, ASCII Group Member Since 2012
This is another in the arsenal of tough lessons that most small business owners learn — charging your customers more. It isn’t unusual to be very nervous about raising your rates for fear you will lose a client. In an ideal world, best practices would dictate that you raise your rates every year. In the real world you should review your rates every year, along with your associated costs and general economic conditions in your little corner of the world. If times have been tough, you might not elect to raise your rates even if it has been a few years. However, you might also decide that the time has come for an increase.
Remember, “customers” are not the life blood of your business — the right customers are. As always, there are two primary ways to improve your business: grow your overall customer base or improve the quality of your existing one. Your pricing establishes what sort of firm you are (or want to be) and what types of customers you will service. There is nothing wrong with being a low-cost provider, but you need to keep in mind that it is a rare client who has reduced expectations simply because they are paying a lower price. Similarly, being the high-cost provider in any market is an enviable perch but you have to do the legwork to justify that fee structure. The point being that either situation is fine, as long as it is part of your business plan. Most providers fall somewhere in between and here are three reasons to justify raising your rates:
- Having very high utilization can be good but it also may be a sign you need to raise your rates. If you are so busy you cannot seem to get ahead, “weeding your garden” of lower quality customers (slow payers, chronic complainers) may be in order. If you raise your rates, these clients may seek a more economical service.
- Every year you should re-examine your rates. Consider the general economic conditions in your area, your costs, and decide if a rate increase is appropriate. Good customers normally do not object to minor rate increases when you are providing quality service. If you do not keep your rates current, you may end up in a revenue crunch when the time comes to invest in your business.
- Survey your competition! If your rates are too low, it’s time to embark on a multi-year strategy to get your rates in line with your competition. New business owners will often price their services far below market and need to adjust upwards. Do not be shy about this but keep your increases defensible and spend the time required to calculate a rate that you can live with. Clients will appreciate that you are being proactive about your business. After all, their business depends on yours!
It goes without saying that smaller increases, even over the course of several years, are preferable to a single large increase. If you set expectations properly with your clients this should cause little or no difficulty. However, If you are making a rate adjustment much outside the range of inflation, it is a good idea to either make the change large enough that you will not have to consider a rate increase for several years or spread the increase over several years. Clients do not want surprises when it comes to their monthly costs.
Finally, do not even consider simply sending out bills with new rates. Well in advance of any rate increase you must communicate with your customers. Pick up the phone and call your highest ranking point of contact with each client! Do not leave this to email or other impersonal methods. This needs to be a conversation for which you are ready — be prepared to convey what has changed and how the customer will see increased value. This needs to be a process, not something you just “do” and hope for the best. If you just send a bill with new rates it will end poorly. Do not leave your great clients to chance!
At the end of the day, adjusting your rates is only as hard as you make it. Yes, your rates need to be market-based and supported by your business plan but that is work you do well in advance. If you are confident in the service you offer and present your rate structure in a clear and concise way, you have little to fear from raising your rates.