Many new professional-service or creative-service businesses price their services below market as a way to bring in business. There is some logic to this practice. Since you lack client references and a demonstrated track record, there is more risk for the initial few clients. But pretty soon, as business increases, so too does your overhead. You may want to hire a bookkeeper, get some administrative help, find a bigger office, the list goes on. Soon, you find yourself with a growing business but not a growing profit. What’s the answer? Should you raise prices?
Your current clients, the ones who made this success possible, have put a value on your services – a value that you initially set for them. So, if you raise your prices by 20 to 40 percent, even though it’s closer to what your competitors charge, your customers may think, “Wow, that’s expensive!” But, if you don’t raise prices, you are working for nothing!
When you price yourself considerably lower than your competitors, your services are viewed as being “cheap,” regardless of their true market value. This leads to a number of problems. First, you train your customers to expect that the service you provide is “worth” what they are paying for it, even when it’s much lower than the market value. Second, you prevent yourself from investing money in your business (i.e., administrative staff, equipment, new services) that would allow you to provide more value to your customers and enable your business to survive and grow for the long haul.
Third, and most alarming, you may be costing yourself some very profitable business! How can low prices cost you business, you wonder? Well, if you need surgery, would you look for the cheapest surgeon? If you had an important legal matter, would you go to the cheapest attorney? Probably not. It is natural for you to want a doctor or lawyer who is competent and knowledgeable. But, to get that level of service, you must pay for it and they deserve to be paid for it. In a professional-service business, you are sought after because of your knowledge or talent in a certain area. You are an expert. And, you have value. Your prices should, and must, reflect that value from the very beginning of your business and at the outset of every relationship with each client. If your prices are low, people tend to treat your service as low-value; if your prices are higher and in line with your value, people will take you, and your business, more seriously and attribute a higher value to your services.
Here are some things to consider when setting your prices, be it now or from the beginning.
- Do your research. Check out your competition, especially those who are
successful. What do they charge and why are you different? Be prepared
to answer that question for your customers and potential customers.
- Know your costs. This includes your overhead costs because you need to
set prices in such a way that you make the profit you want and need.
Proper pricing can help you ensure the long-term health of your
- Don’t discount. If the value of your services is $5000, why would
you offer it for $4000? Is it less valuable to this client than it is
to others? If so, let’s find more of those clients who find it more
valuable. After all, you’re a professional, not a discount shop.
- Don’t bill by the hour. There are very few professions in which hours
provide a good measure of value. For example, you are a designer and
after working eight hours on a design, you have nothing but a pile of
crumpled paper to show for it. But the next day, while in the shower,
you have a great idea that launches you in a new direction. How do you
bill by the hour for that? Can you really expect the client to pay for
the eight unproductive hours? How would you even bill the “shower
time?” If the value you create is knowledge work, work you do in your
head, you have these same issues.
Worse yet, with hourly billing the more experienced you become,
the more efficient you are, the less money you make! The client doesn’t
care if it took you 50 hours or 50 minutes to design their marketing
piece. As long as they receive a terrific design, it has the same value
So now you say, “OK, Brad, you’ve convinced me – how do I raise my prices?”
At first, leave your current clients alone. Instead resolve not to accept any new business below your newly established higher price. Publish new contracts, price sheets or rate cards and stick to them. Once you start receiving business at your new price level, you will feel very different about your service. And why? Because your clients have given it a higher value!
Once you establish the new pricing with your new clients, then deal with your old clients. Have a face-to-face meeting with them, preferably, and review with them the value of the services you deliver. Let them know that you have researched your competitors and found that you are offering more value for less money. Also, let them know you are billing new clients at the higher price level. Then, raise their prices with an effective date two to four months in the future. This gives you a chance to finish current projects or services at the present price while allowing them time to adjust their expectations and budgeting for future projects or services. As a sweetener, you can offer them the chance to pre-pay now for future projects or services so as to “lock-in” their current low rate. This gives you the certainty of their future business as well as cash in your pocket today!
Setting your prices at the true market value of your products or services will secure client loyalty and respect, allow you to invest in and grow your business, and improve your profit margins. The long-term health and success of your business depends on your ability to project, and protect, its true value. If you, as the business owner, don’t value your own products or services, you can’t expect your clients to value them either. Don’t settle for less than you are worth!
Photo credit: mrlerone