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If you work as an independent professional or employee whereby you get paid by the hour, then your income depends heavily on your hourly rate. So obviously if you can raise your hourly rate, you can earn more money without working longer hours.
But when does it make sense to raise your hourly rate? How do you know if you’re charging a fair price for the service you provide?
When Not to Raise Your Rates
If you’re going to raise your rates, there should be solid business reasons for doing so. In the absence of such reasons, it makes no sense to raise your rates.
Because you feel like it is not a solid business reason.
Nor is the desire to earn more money. That’s a nice intention, but it’s not a justification for charging your clients more for the same service.
When to Raise Your Rates
Here are some cases where raising your rates may be a wise choice:
1. You’ve improved your service and/or skills. If you’re able to provide more value to your clients in less time, then raising your rates to reflect your increased quality and efficiency is reasonable.
2. The supply-and-demand curve for your service has changed. If you’re missing opportunities, becoming overbooked, or having to turn away clients because the demand for your service exceeds the supply, then it makes sense to raise your rates to bring supply and demand into better balance.
3. You want to work shorter hours. If you want to reduce the number of hours you work with clients, you can raise your rates to reflect the scarcer supply.
4. You’re testing to gain more information. Testing a higher rate is a perfectly valid business reason. However, before you test new rates, be sure to have a fallback plan in case the new rates meet with too much resistance.
5. You want to reposition yourself. Positioning or branding are also valid business reasons for raising your rates. However, you’d better have the necessary skills and experience to back up your new positioning. If you want to be a high-priced consultant, be sure that you can consistently deliver high quality results. Otherwise if you charge premium prices for less-than-premium service, you’re essentially scamming people.
These are some of the most common business reasons for raising your rates, but there are others, many of which are field-specific.
Common Mistakes to Avoid
Here are some common mistakes people make when raising their rates:
1. Not raising rates at all, i.e. undercharging, is a common business mistake. This means leaving lots of money on the table and being paid signficantly less than you’re worth, especially as your skill increases. It’s a suboptimal way to run a business or build a career.
2. Not testing is another huge mistake. If you never test higher rates, you’ll never know how much potential income you may be leaving on the table. A good approach is to test higher rates with new clients first, but keep your existing clients at the old rates for a while. This way you don’t have to risk losing your old clients if a rate increase proves ineffective and you decide to return to the old rates.
3. Raising rates beyond what the supply-and-demand curve will bear is a common novice mistake. Some people want so much to be on the same level as the experts in their fields, but they haven’t yet acquired the skills to justify such high prices. It’s best to keep your rates reasonable (even low) until you’ve built up a decent client base. When you reach the point of having to turn away business because you’re getting overbooked, then it’s time to raise your rates. But if you overcharge right out the gate, many potential clients will know you aren’t worth as much as a seasoned expert, and they’ll avoid patronizing your business.
4. Changing rates too often is a less common mistake but still one to be avoided. If you’re changing your rates every season, you’re going to confuse your existing clients. Frequently changing your prices will make it hard for your clients to see how your services might fit into their budgets.
Don’t be surprised if you initially see a decrease in business whenever you raise your rates. If the rates are reasonable, business should pick up again within a few weeks.
How to Raise Your Rates
Here’s some advice to help you get your hourly rate trending upward:
1. Invest in improving your service. Keep adding value; don’t get complacent. The more you improve your service and skills, the more you can charge. Note that more knowledge doesn’t always translate to better service. If you want to increase your rates, then focus on building skills with market demand. Don’t waste years learning how to do things that no one needs done (or that can be done at a lower hourly rate than what you’re already charging).
2. Over-deliver. Provide such outstanding service that your clients feel compelled to talk about the great experiences they had. This will help your client base grow via word of mouth. Let a high quality of service be the central core of your marketing efforts. Violate your clients’ expectations in the best way possible.
3. Keep non-core work from becoming a distraction. Take the time to establish and maintain good systems for invoicing clients, educating new clients, handling tax filings, etc. Put this type of detailed work on autopilot so it doesn’t become a distraction.
4. Collect testimonials. When you do good work for a client, ask for a testimonial. Most satisfied clients will be happy to provide them. Then you can share the testimonials on your website or other marketing materials.
5. Ask for referrals. Ask your clients for referrals to others they feel might benefit from your services. Some businesses even go so far as to “fire” clients who never provide any referrals because such clients are dead ends. If it seems reasonable to do so, formalize your referral program and offer referral incentives, such as by providing an affiliate program your clients can join.
6. Leverage your strengths. If you do work that you’re especially good at, you’ll be able to raise your rates faster. Switch fields if necessary, but make sure you’re working in the sweet spot of your core talents and skills.
7. Care about your clients. Treat your clients as real human beings, and they’ll be more likely to want to continue doing business with you — and to refer their friends, families, and co-workers to you. A business is built on relationships. If you treat your clients coldly, don’t be surprised when they respond coldly to your requests for referrals.
8. Keep in touch. Don’t be a stranger. Check in on your clients now and then. Let them know about meaningful improvements to your service. Don’t spam them with fluff, but do maintain the relationship you’ve built.
9. Reactivate dormant clients. A client may go inactive for a variety of reasons, and many of those reasons have nothing to do with you. There’s a good chance that such clients can be reactivated, even after a year or more of inactivity. Maybe they had a bad year. Maybe there were some personal issues they had to attend to. Maybe there was a misunderstanding that can be remedied. If you’re open to doing more business with this client, reach out and reconnect. The worst case is that they won’t do business with you again (which is no worse than the status quo), but the best case is that you reactivate a good client who continues doing business with you for years to come, and they may generate fresh referrals for you as well.
10. Embrace change. The world is awash in change, and change represents opportunity. Don’t be a dinosaur. When you see industry-impacting changes occurring, jump to the front of the line, and look for ways to leverage those changes to provide new and better services. For example, what new technologies are becoming available that are causing surges in demand for software developers and consultants?
The best rates for your service will ultimately be determined by the marketplace. Sometimes you’ll be delighted by the results. Other times you won’t like the market’s verdict, especially when it tells you there are few people willing to pay you what you’d like to earn. Realize that this is only a reflection on the social value you’re currently producing; it doesn’t speak to your intrinsic value as a human being. Accept the market’s feedback for what it is, and use it to make better decisions as you move forward. Don’t try to argue with the market — you will lose!
The nice thing about setting your own rates is that the sky is the limit. You may not be able to control market forces, but you can control how you angle your virtual surfboard and ride those forces. Will you let them toss you to the sidelines, or will you ride them to the top?
Keep in mind that even if you’re an employee, everything in this article still applies to you. In that case you’re simply contracting with a single client. You still decide what rates you charge for your service; despite appearances to the contrary, that decision isn’t up to your employer. For more on this topic, see the article You Are Self-Employed.