Pricing is one of the trickiest strategies in a small business. It can be simpler if you are selling a competitive product that has well established market rates. However, most small businesses struggle with being competitive, yet covering their overhead.
It can be especially difficult to establish pricing for services. And now that the internet has provided us with a global market, finding out what a market rate is when the whole world is your market can be overwhelming.
Here is a case study of when you should raise your prices:
I have a client right now who has a service that is his own personal time and expertise. He is a coach and a counselor like me. His week is full. Six to eight months ago he raised his prices for one of his services. It was nerve-racking but for the most part, he didn’t lose any clients.
Talking to him recently he is more than full again. As a matter of fact, he has extended his hours past a full time schedule. When your time is the service, this is difficult to sustain.
But we all need the money right?
What do you do?
My recommendation: Raise your prices.
His concern is that he would lose clients. When you are working at over capacity, you need to lose some clients. His response is, “But I need the revenue.”
This is a simple case of supply and demand. He has a surplus of demand at his current prices. His supply is tapped out. He doesn’t have the time to even stop and try to get help. We have plans to change some of his services to groups, workshops, webinars, etc. However, at the moment he is back to back clients. (I know it is an awesome problem to have except it is exhausting to sustain. Read some of my previous articles on burnout!)
In the case where human nature has enabled you to over-commit your time, the first step is to get it back without shrinking your business.
Here is the process we worked through to determine what his rates needed to be in order to achieve his revenue goals without killing himself.
Determining Your Prices When Demand Exceeds Supply
1. Determine what your current average hourly rate is for your services. This is weekly revenue divided by direct hours.
2. Determine the weekly revenue you need to pay your overhead and make the personal income you need.
3. Divide your desired weekly revenue by the targeted number of weekly direct hours. If you are a coach, consultant or plumber, you can only do actual client work for a certain # of hours a day. You need to leave some time to work “on your business.” A reasonable # of hours that is sustainable is probably 25-30. You can do 35+ on occasion but I don’t believe this can be sustained and maintain your quality and your health. Something has to give. This piece will give you the hourly rate you need to make.
4. In comparing your hourly rate needed to your current hourly rate, you need to assess the gap. If it is large, you may have to take steps to get there.
How to Implement Your Price Change
Sometimes we want to test the waters. Sometimes, the change is so high that we want to take steps. Either way, here is a strategy to approach getting up to your needed pricing:
- Raise the price for any services that are under the average rate needed up to a minimum of the average rate needed.
- Begin with charging the new rate to new clients. Remember though, adding new clients adds actual hours. Some we will lose by natural completion and attrition. Hopefully, it will be the lower price clients. But sometimes it isn’t.
- Once you have new clients beginning at the higher rate, then you have to work on the clients still at the lower rate. There are still a few choices. You can:
- Go up on all of the lower rate clients assuming you will lose some, but trusting that most will stay because of the services you provide.
- You can space out the lower price clients and communicate openly that in order to keep their price at the prior lower rates you need to meet less frequently or put these clients in a group.
- Another option is to refer the lower priced clients out to another supplier you respect or they can stay if they want to pay the higher price.
Over time, this will move your average hourly rate up. Additionally, if you have some services that are at a higher rate per hour than the average needed you can add marketing for those services and work to increase that service to be a higher percent of the business.
The Key To Sustainability
This is always a slippery slope in a service business because we know that business can ebb and flow. We try to add, add, add when the demand is there!
But at some point we have to turn it over to God and trust.
As a Christian in business, we want to be fair and ethical. It is fair and ethical to charge competitive prices and to follow the laws of supply and demand.
As a Christian in business, we want to be able to help as many people as we can. However, if we exceed our own personal limitations we could end up burning out and not being able to help anyone.
The key to sustainability is to balance all of these factors. We need to look at competition, the service provided, and supply and demand to create our pricing strategy. We have to back into a reasonable work schedule for ourselves personally. If not, we won’t be able to sustain it.
Once your direct hours are reasonable, then you free up time to work on other ways to grow:
- hire other team members
- change your service to groups or workshops
- change your pricing to package pricing and not trading time for money
- create products to sell
These are just a few ideas that can be considered for a coaching and consulting business. Depending on your business, there may be others.
The first step…..decide if now is the time to raise your prices.