How To Raise Rates

Sunday, January 17, 2016

I recently heard from the owner of a consultancy. He was thinking about raising his rates for existing customers.

The good news is that raising rates is easy! You just demand more money.

Unfortunately, it doesn't always work. There's a great story about a famous billionaire that illustrates this point perfectly. Note: I'll anonymize his name because I don't enjoy getting sued by famous billionaires.

Susan had been with her famous billionaire boss for years and had a great reputation. One day, she walked into her boss' office and demanded a raise.

Never one to make a rash decision, the famous billionaire took some time to think about her demands. He wasn't sure how much more he should pay for her services, so he researched her accomplishments.

A week later, he called her into his office to hear his decision. She was fired.

Upon investigation, it turned out she wasn't that valuable after all. Not only did she not deserve a raise, she didn't even deserve her old salary either.

Where did Susan go wrong? She raised her rates like an amateur. It's often a terrible idea to simply "raise rates" with existing clients. When you request higher payments, you force each customer to reevaluate his entire relationship.

For this reason, many companies believe that raising rates for existing clients is a bad idea. They grandfather customers on older plans to ensure that customer flight is kept to a minimum. The benefit of this strategy is safety. Payments from existing customers will provide a dependable income stream and support the firm while it seeks out new customers who are willing to pay larger sums.

The best approach is to attempt to upsell existing customers into more expensive plans. Rather than forcing customers to decide if they should quit, have them ask themselves "should I pay more in exchange for more value?"

This question is very safe for a business to ask its customers, because there is no push to reevaluate the entire relationship.

So how do you decide what additional offerings should be bundled to encourage them to pay more? Look for items that cost you very little per customer, but are valued highly by your customers. Ideally, your costs will be incurred only once, but you'll be able to sell the value it generates to your customers repeatedly.

Here are a few examples of great upsells:

Whatever you do, avoid the trap of thinking "If I charge them more, I have to work harder." Always focus on increasing the perceived value you provide to your customers.

So how do you handle the details? The easiest way is to contact me for a consultation. I can help. Don't forget I literally wrote the book on pricing!