Raising Rates Without Losing Clients

By BRENT BOWERS

With the economy in the doldrums, the question that consultants, freelancers and other solo service providers have long puzzled over — How to raise prices without losing customers — just got harder to answer.

After all, a client who is also struggling is not likely to sympathize with someone else’s financial woes.

Ruth Deming, who quit her job as a psychotherapist to start the New Directions Support Group in Philadelphia for victims of depression and bipolar disorder, contacted me recently to voice her frustration about the low return on her labors. “We draw 60 people per meeting and charge $3 per person,” she said. “Any ideas on how this penniless do-gooder can make more money?”

At about the same time, I received another e-mail appeal from a reader, who did not give his name or respond to subsequent e-mail queries. But I found his question timely. “I’m at a critical point in my one-person consulting business, three years in, becoming ‘the guy’ that my clients turn to when they need to learn as much as they can about a competitor, a potential acquisition and the like,” he said. “My quandary: having offered below-market (but fair) rates for my first few years to build my client base, I’m now a bit uncertain as to how I can/should raise my hourly rates closer to industry norms without alienating my existing base, all of whom have given me very positive feedback about the quality of my service. Are there any delicate yet firm ways to navigate this stage of my business’ growth?”

And finally, Caryn Leschen, a San Francisco graphic designer, copywriter and illustrator, who charges $75 an hour, told me that she has developed strategies to deal with sticker shock, ranging from hand-holding to breaking up the cost of a project into small pieces.

Ms. Deming, who is 62 years old and describes herself as a cured manic depressive, has been juggling quite a few entrepreneurial balls. In addition to running her support group, which meets twice a month, she teaches bread-making classes, holds an occasional seminar (including one at a local hospital on the “joy of intimacy”), does counseling, writes freelance newspaper articles, drives women to doctors’ appointments and works as a poll inspector during elections. But all those undertakings do not add up to a lot of money. Even with the Social Security checks she now receives, she has trouble making ends meet.

To her question about how to make more money at New Directions, my amateur advice was to raise the fee to $5 from $3. Though a 67 percent increase, it would be from such a small base that few participants would be likely to object, I reasoned, and parting with a $5 bill would barely be more onerous that counting out three singles. Yet, her income might well go up by $240 a month.

Ms. Deming agreed to give it a try. But perhaps, I mused after learning that she had started the company in 1985, she needed to think a little bit harder about her finances.

I called Marc S. Jacobs, founder of the New Business Directions consulting firm in Blue Bell, Pa., who had recently done pro-bono work advising Ms. Deming on how to improve her business model. I asked him what steps he would recommend to solo entrepreneurs who want to raises their rates.

There is a simple formula to calculate a minimum hourly rate, he said, but it cannot be done in a vacuum. It is imperative, he said, for these entrepreneurs to write a business plan first that states clearly what they want to do, how they intend to do it, and foresees revenues, expenses and profits for the first several years.

Once they have done that, Mr. Jacobs said, they should add up weekly living costs and business outlays and divide by 20, which is the number of billable hours to shoot for. “Now you have what you need to charge per hour, and you can compare that to the marketplace rate,” he said.

Entrepreneurs who are just getting started will probably have to charge less than seasoned competitors, he said. So much the better if savings can subsidize their initial efforts and give them breathing room to expand the business.

What about my recommendation to Ms. Deming to raise her fee to $5? Mr. Jacobs was skeptical that it would solve the problem. “Moving it up by $2 would be helpful, but it’s not going to change her ability to make this happen as a business venture,” he said.

As for the consultant who wanted to know how to augment his rates without alienating existing customers, Mr. Jacobs’s counsel was to be gentle.

First, he said, increase them for new clients only, and use the exercise to explore how high you can push the rates.

Then, he said, the consultant should inform existing customers in person — not in writing — that he plans to raise rates by 5 to 10 percent. “Have a conversation as part of a regular visit,” he said. “Make it casual. Tell them why you’re doing it. Say something like ‘I hope we can work out an agreement.’ ”

Some customers will say there is no way they can afford to pay more, he said. In that case, the consultant have to decide whether to let them go.

Ms. Leschen, the San Francisco graphic designer and illustrator, has been gradually raising her hourly rate to $75 from $40 in 1996, when she started doing Web work.

It is never easy to ask for more money, she said, and she tries to be flexible, charging as little as $60 to nonprofits and up to $100 to some advertising agencies.

Ms. Leschen, 49, said she has had to fight her natural inclination to please customers with bargain prices. For a given job, she said, “I think in my head, ‘Say $500,’ when I know I should really say, ‘$1,000,’ and then I hear ‘$700’ coming out of my mouth.”

One of her tricks for forcing herself to give higher numbers, she said, is to stop thinking in dollars and “pretend it’s a different money system; pretend it’s lire,” a reference to the Italian currency that was trading at 2,150 to the dollar before it was replaced by the euro.

Another way she tries to soften the blow to customers with tight budgets is to break down an undertaking into “pieces,” she said. Rather than quoting a price of $5,000 for a project, for example, she will offer to do the first step, creating a company logo, for $1,200, and go from there.

As she designs the logo, she says, customers are invariably asking her for additional work, and she cheerfully complies with their requests. The result is that they rarely complain if her final bill is at the high end of her original estimate.

Finally, after working with someone with technology know-how this year to start a venture to create Web sites called the Site Kiosk, she has found that having a partner can give her the willpower to be a tough negotiator. If her collaborator runs a job estimate by her, “I’ll say no, not $500, it should be $800,” she said.

Ms. Deming, meanwhile, informed her support group last Thursday about her rate increases, and that day collected about $110 more than her recent average. “There wasn’t even a whimper of objection,” she said. “I should have done this sooner.”