When you work for someone else, they decide what your time and energy is worth; determining your value when you’re self-employed, however, isn’t as straightforward.
As a small business owner, freelancer or contractor your rates will typically depend on a range of factors, including industry, geography, clientele, level of service, your professional experience, and the cost of any raw materials or supplies that are required to build your product. Even still, these factors only tell part of the story. Determining where you land within typical industry ranges is often hard to judge independently, and while there are plenty of philosophies on the “right way” to calculate your rates, there is no universally accepted measurement.
On top of that, finding the right price for your product or service is often a moving target, and while one price tag may fit today, it won’t necessarily be in your best interests tomorrow.
Common signs it’s time to raise rates
As an entrepreneur it can be difficult to know when it’s time to raise the prices of your products or services, but there are a number of signs that might suggest your business is ready to take that step.
For example, freelancers and service providers often keep their prices low as they work to build a client base, but find that they have too many customers to keep up with.
That overloaded schedule is a strong indicator that it’s time to increase rates. After all, even if some clients object to the increase and stop using your services, others will be willing to grow with your business, and can help fill in those revenue gaps. As a result, you are likely to find that you’re able to earn the same amount or even more money while moderating your client portfolio.
Another sign that it’s time to ask for more money is when the cost of providing your product or service increases. Expenses like rent, raw materials, cost of living and payroll rarely stay consistent, and your prices will need to grow at similar rates in order to keep the business afloat.
If you’ve been humming along at the same price point for a significant period of time, it might not be a bad idea to ask for a bit more. After all, customers expect the price of goods and services to increase over time, and are typically more than willing to work with you if you’ve built that positive track record and confidence together.. If a customer doesn’t feel comfortable with the change, consider how your business is affected by keeping them in your portfolio.
Do your homework
When you’ve determined the right time to increase your rates, you’ll have to do a bit of homework to determine exactly how much they should change. Begin by consulting with mentors, experts or colleagues that have a strong sense of what’s typical in your industry, location and/or niche. You can also check online forums, job postings and websites GlassDoor, Bonsai, and LinkedIn Salary to get a sense of the standard rates for your services. Keep in mind that, although there are standards for each industry, you should adjust the rates of your products or services to accommodate the needs and growth of your own business.
Finally, consider talking to your customers—especially those with whom you have a longstanding relationship—and engage them in an honest discussion about your prices. Ask them if they would feel comfortable paying the new rates you are planning to apply, and be as transparent as you can about why you believe this change is warranted. Though an increase always carries the potential of scaring away clients, most will appreciate the opportunity to be part of the decision making process and will take this opportunity to renew their loyalty with your business.
Female entrepreneurs are statistically overdue for a raise
While the rise of independent employment was widely considered a solution to the gender wage gap, it has unfortunately spurned a gap of its own. Women still earn 81% as much as their male colleagues in the traditional workforce, but research shows that the average woman entrepreneur charges only 68% of the industry-average price per service. While it’s difficult to pinpoint exactly when it’s time to raise your prices, female entrepreneurs are starting to take charge of their business and stand for equal pay.
If you’ve determined that it’s time for a rate increase, the invariable next question becomes “by how much?” While there is no right answer, there is an acceptable range. For instance, while a rate increase of 1% may not seem worth the effort, a rate increase of more than 20% is probably not going to sit well with your existing customers or compete positively within your niche.
When a significant rate increase is necessary (more than 10%), consider rolling it out incrementally. This can help you mitigate tough conversations with your clients, and keep them appraised on any upcoming, related changes. As we talked about earlier, being upfront with your rate changes can make it easier for your customers to manage this change on their end, but it also gives you the opportunity to determine the effects of each incremental change on your overall business, like changes to your cashflow, or other expenses incurred.
Start with new clients
While you’re incrementally increasing rates for existing clients, you can also experiment with charging your full new rate when onboarding new customers. This is an easy way to gauge the market’s reaction to your new prices and test the waters before diving in. You may find that customers are less likely to engage with you at this new price point, so consider revising your numbers and trying again; or you may find that they have no objection to your higher rates, and you can start earning more sooner. You won’t know until you try.
The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.