The next time you take on a freelance job, tell your client the new rate. Don’t mention the old rate. Simply tell them the new one.
What’s your new rate? It’s your current rate, plus 50%. Or, if it’s a client that you could do without, it’s double your current rate.
It seems crazy. Won’t all your clients abandon you? Won’t they balk at what you’re asking? No. Odds are they’ll pay the new rate. Meanwhile, any client that refuses the price increase will more than likely be made up for with the clients than stick around and pay you more.
Why then, does this idea seem so uncomfortable?
People and businesses are just not used to experimenting with the price of something, the way we would A/B test a website or tweak a headline. Pricing is a funny thing. For decades, it’s been considered an art. Companies often use what’s known as “cost-plus” pricing to set the worth of their good and services. They add up everything that goes into the product, tack on a percentage profit margin, and arrive at the price. So if a t-shirt were to cost $10 to produce and the company wanted a 50% profit, they’d price it at $15.
But there is also a lot of psychology that goes into pricing as well. Businesses go to a lot of trouble to price at a level they believe people will think is “fair.” That’s why an iPod Nano costs $149. Not only does it offer a hefty margin for Apple, but it’s a price that would be interpreted as fair for the product.
Here’s the catch — every consumer has a different interpretation of what is fair. And for most products a company can’t test pricing to see what is most profitable. Apple can’t put out different prices for the same iPod. It would be a logistical and PR nightmare. In other words, what is arguably the most important factor in profitability for a company — pricing — is often left up to a best guess.
Don’t believe me?
Here’s what the MIT Sloan Management Review said in an article titled, “Is it Time to Rethink Your Pricing Strategy?”
Fewer than 5% of Fortune 500 companies have a full-time function dedicated to pricing, according to data from the Professional Pricing Society, the world’s largest organization dedicated to pricing. McKinsey & Company has estimated that fewer than 15% of companies do systematic research on this subject. And only about 9% of business schools teach pricing, according to the Association to Advance Collegiate Schools of Business. This neglect is puzzling, as numerous studies have confirmed that pricing has a substantial and immediate effect on company profitability. Studies have shown that small variations in price can raise or lower profitability by as much as 20% or 50%. (Emphasis added)
How would you like to be able to earn 20-50% more for the same work?
As a freelancer, you have a huge advantage. Working with multiple clients, you can experiment continually with the prices you charge. Each client is a different test case. If you’re uncomfortable with large increases, or you are scared of losing clients, then start with small bumps for projects. But where you’ll see the biggest gains are with new clients where you simply start out at a much higher rate. If you already have a steady flow of work, then the risk of trying this out is zero.
What you’ll likely find is that clients are open to the increases, even if they grumble about them. This especially goes with clients that you’ve worked for regularly in the past. With these clients, you already have a built-in relationship. They know you and are comfortable with the work you produce. For them, the even bigger cost would be the time and energy to find another freelancer to do the work.
Have you raised rates successfully? Tell us the details in the comments below.