Communicating a Rate Increase to my Clients

I currently run a two person web development team. My partner and I offer Ruby on Rails programming for our clients (small companies). We typically charge $75/hr for most of our clients but we have two old clients for which we charge $50/hr and $55/hr respectively from when we first started. The former we have never had a rate increase since we started with them in early 2007 and the later we have not had a rate increase in two years. We bill about 50-80 hours a month of work per client for both clients. Both clients are excellent to deal with and I want to continue our strong relationship going forward.

I would like to get both these clients rates up to $75/hr which I feel is more in line with market value and our level of expertise. What is the best way to communicate this? Should I do it in person? Is an email ok? Also, I'm not sure asking a client to go from $50/hr to $75/hr is acceptable since that is a 50% jump. What is an appropriate rate increase per year in software professional services? Any thoughts will be greatly apprecited!

Thanks,

ACC

ACC, I just dealt with a similar situation. First it's good you have a strong relationship with the client, so the goal is to keep it that way. Here are my recommendations:

Don't send the rate increase info in an email, too impersonal. I tried it, it didn't go too well (and mine was was only a 15% increase). Email is not the best way to communicate what will most likely turn into a severe budget shift on your client's end. They are either going to pay more $ for the same amount of work, or get less work for the same amount of $. So, I would recommend an email to setup up a in-person meeting if possible (money gets personal) otherwise a call will do.

I have a close relationship with one of my clients, who I bill around 60-90 hours per month.

A few things I explained in a meeting: I am a small business... I charge other clients much more, and the more work I do for you, the less I do for them, which means I am making less money than I could and I have bills to pay.

He understood, and explained to me that he is giving me guaranteed business every month and it has been that way for the last 2.5 years. It's hard to beat guaranteed income.

In the end, I got a raise, it wasn't what I was charging other clients, but was fair to me and him. Also, it didn't go into effect immediately, I gave him like a month or two to prepare for it.

At the end of the day you are both in business to profit, good long-term clients understand that, and want you to stay in business (at the very least to keep their project going).

Hope that helps.

does the rate increase need to be immediate? Would you be able to phase them in somehow over time (i.e. in $5 increments?). In order to "soften the blow," you might consider adding some value to the service you're providing that comes at little/no cost to you (i.e. 1 free hr of phone consultation/tech support each week or give them a Google Voice invite).

The bottom line for your business is whether you would lose these customers to competitors if you were to raise your rate. You might want to provide a survey for your clients asking about improvements you could offer that other companies are offering. That will give you a feel as to who your direct competitors are and you can check their rates from there.

Alternatively, you could do something similar to what supermarkets do -- when they provide discounts for some items (i.e. potato chips) to boost sales volume, they make up for the cost of the discounts by marking up other complementary items (i.e. soda). In your case, the discounted items are the legacy customers and the markups would apply either to 1) new customers or 2) to complementary upgrades for the legacy customers. Think carefully about whether you are comfortable with shifting some of the legacy costs to new customers, as this may not be a viable long term business model. However, it's possible to shift the cost only partially to new customers and to complement this strategy with new price phase-in as mentioned earlier.

Regarding 2), insurance companies experience a similar situation for legacy subscriptions/plans (i.e. life insurance) that have not adjusted to market value. Although I'd advise against relying on this strategy alone, you may find it useful in conjunction with the cost-shifting and phase-in strategies above. For example, you can demonstrate that the Rails library has expanded and you will be using newer and more diverse resources than in the past, justifying some of the cost increase.

Remember to be honest about market drivers/pressures you're facing. The face-to-face conversation as suggested above is advisable. Customers may be more sympathetic to real-life economic constraints than to attempts to "up-sell" to them.

Would it be good to update your overall rate structure soon, or not? If a price increase for all customers is warranted, then you could:

• Communicate this change to your customers in your public price list, and emails to customers etc, as your would normally do.
• Talk to your valued customers from the early days. Tell them that you'll honor their old price for a period after the rate increase takes effect for others. Tell them that this, together with the years without a rate increase, is your small thanks for their support in the early days.

If a overall change is not warranted, then you could:

• Meet face to face with your customers. Tell them that the rate needs to be re-negotiated, and cite your rates with other customers, market prices, inflation, you're loosing money on the deal, etc.
• Work with your old customers to either increase the rate, or gain something else that is of equal value for you (assuming there is such a thing). This could be prepayment for a monthly number of hours without carry over of unused hours, or more flexible deadlines, or maybe something else that's valuable to you.

No matter what game plan you choose, you should do this face to face, and with your primary sponsor / decision maker as the only other person in the room. Nobody likes price increases, and your sponsor in the other company might need time to break the news to his management in a constructive way.

I agree with what most of the other answers say. I would add this: Understand and be able to express how you add value to your clients' success. Be prepared to raise the point when you discuss your rate with them.

It's not enough to say "I'll lose money if I don't raise my rate" – you should also be able to say "Look how I've helped your business succeed. We work well together."

Here's another (late to the game) point: if you are feeling awkward about this, perhaps that's because you're not regularly communicating with them on a "customer affirmation" level.

If you follow a deliberate, consistent practice of communicating with your clients from time to time in a way that affirms their wisdom in having chosen you as a vendor/provider/trusted advisor, then when you have to communicate a price increase it will be to an audience that is already predisposed to value you more highly than if you had not been doing so.

I would simply tell them about the new prices when they bring you a new job. At that time, you can tell them in person about the prices, and remind them how you add value to their business.