How to Raise Prices without Losing All Your Clients
One of the biggest struggles faced by owners in every industry is this—“How do I raise prices without scaring off all my clients?” It’s one of the most impactful issues I address as a fractional CFO.
I once asked a client who had been in business for a long time how much they were charging a particular client. They said, “They were one of my first clients, and they get the rate of $99 per hour.”
“Wait,” I said, “Isn’t your current rate $135 per hour?”
“Yeah, but they've been so good to me.”
Why We Don’t Like Raising Prices
If someone’s a considerate owner (and I know my clients are), this comes from a place of loyalty. They love their customers and clients. They always want to provide the best quality, especially to clients who have been faithful for years. Emotions get involved, and it can feel disloyal to raise rates when a client has been used to a certain price for a long time. These long-time clients get grandfathered into a rate that was set 2, 4, 8+ years ago, and it’s easy to rationalize never increasing those prices.
Why We Have to Raise Prices
Unfortunately, at some point that $99/hr became too low, and they weren’t actually making any money. I’ve seen situations where the business wasn’t even breaking even on their lower-paying clients. For instance, they might have a client who pays $3,000 a month, but it costs $3,600 to be able to serve them. In that case, letting that client go would actually raise the business’ bottom line by $600! And that’s not a joke. Think about what was happening financially. The revenue earned from the higher-paying clients PAID for the cost of serving the lower-paying clients. And that’s not good. That’s not good at all.
Because we still want to help (and hopefully keep) those lower-paying clients and guarantee that their contract is sustainable for our business, we use this approach to gradually bring them up to the current rate.
How to Raise Prices without Losing All Your Clients
Set a Pricing Model
First of all, we don’t just randomly pick a number for the new rate. At AFS, we do an actual pricing model for our clients. We consider what the service rate needs to be to cover a fully-burdened labor rate, overhead, etc. Or for agencies, we look at what the cost of the service includes (like subcontractor wages). We calculate with solid numbers so we know what the final service rate needs to be.
Gather Client Data
Next, we list all the clients that are currently being charged the lowest rate. We look at their data: What is their current rate? What service do they usually get? What value-adds could we reduce to make their contract profitable without increasing their price?
That last point is significant. If we take away some of their services, we can still make their contract profitable without charging them more. We try to offer that first whenever possible.
Consider If It’s Time to Let Some Clients Go
This is also a time when we ask clients about who they might not want to keep. It’s something we need to talk about. Every owner probably has one or two clients that served the business well at one point, but they just aren’t a good fit anymore. If they also aren’t contributing to the business’ bottom line, it might be worth considering whether or not to keep them.
Now we know our goal price, who we want to offer a reduced service for the same price, who we want to negotiate with for a higher price, and who we want to let go.
Plan the Messaging around Raising Prices
Here’s how we communicate increasing prices to clients when it’s not appropriate to offer reduced services. We make sure to cover these points:
You’re currently at $99/hr.
We’ve raised our rates, so here is where we need to get you—$135/hr.
We’d like to get you to the new rate in the next 18 months.
Every 6 months, we’ll increase by $12/hr.
This approach shows that you’re not forcing them into this new price. They have the chance at every increase to back out of the contract.
Insulate the Business from Lost Revenue
In order to protect the business from potentially losing every client at once, we also take this in batches. We don’t send this message to 30 clients at the same time because there probably are going to be some clients that don’t even want to pay the first increase, so they leave.
(Keep in mind, those are probably the clients that aren’t actually adding to your profit number anyway. Their leaving will affect your gross revenue, your top number, but it’s not going to touch your profitability, your bottom number.)
To play it safe, we like to batch these. If there are 12 people, we do three in the first month, see who we keep, see who we lose. Then next month we can alter our course if needed. For instance, if we lost all three clients in the first round, we skip a month, sign a new client, and then move forward.
Quote All New Contracts at the Current Rate
Perhaps the most important thing is to start quoting new projects at $135/hr. Yes, it’s possible that this was a referral from a past client who told them, “This is such a great deal. They’ll definitely be cheap.” In that case, it’s worth explaining that that job was booked a few years ago and prices have changed.
Same with a returning client. We never want to take a returning client at an old rate unless they’re a monthly recurring contract. If an old client returns, we tell them, “These are our new prices, and here’s how we do it.” Every new contract starts at the new rate. Non-negotiable.
I hope this takes some of the fear out of raising rates. This can be done very gradually, and I’ve seen it done very successfully. Again, there are ways to do this where a client can keep the same rate by reducing the scope of the project; sometimes that goes over really well. Ultimately, we want to see profits begin to increase as we start to understand that we can raise prices without scaring off clients.
If you have questions, please let me know. This is something we do for our CFO clients on a regular basis. It’s that important!