How to Raise Prices Without Losing Clients

Many service business owners know their prices are too low and still put off raising them, because they expect clients to leave. In my experience working with service businesses, a well-planned and well-communicated increase usually loses far fewer clients than the owner feared, and the ones who do leave are often the least profitable.

This guide covers what holding prices still costs you, how to decide how much to raise them by, which clients are likely to leave, and how to plan the increase so your best clients stay.

What holding your prices costs you

If your prices stay the same while your costs rise, the difference comes out of your profit. Take a business with annual costs of £100,000 and inflation of 3% a year. In year one, costs rise by £3,000. By year five, annual costs are about £15,900 higher than when you started. Over the five years combined, the extra costs add up to around £46,800, all absorbed by the business if prices never moved.

Salaries, software, insurance and National Insurance contributions have all risen for UK service businesses in recent years. If you have not reviewed your prices for two or three years, use the calculator below to see where they would be if you had kept pace with UK inflation alone.

Why a small price increase has a large effect on profit

In a service business, most costs are people and overheads, and they stay the same whether you charge more or not. That means nearly all of a price increase goes straight to profit.

A worked example: a business turns over £800,000 with costs of £680,000, so profit is £120,000 (a 15% margin). A 10% price increase with no client losses takes revenue to £880,000. Costs are unchanged, so profit rises to £200,000, an increase of two thirds. The effect is larger the thinner your current margin.

It also works the other way. After a 10% increase, you could lose around 9% of your clients by revenue and still take in the same revenue as before, while serving fewer clients. Very few well-handled increases lose anything like that proportion.

The MSP case study shows the same arithmetic in a real business: an IT company that combined a modest price increase with small cost savings and kept its clients.

How much to raise your prices by

There is no single right figure, but a few questions will narrow it down.

• How long since your last increase? The calculator above gives you the minimum needed to stand still.
• How do you compare with the value you deliver? Prices set by looking at competitors often sit well below what clients would pay for the outcome. The guide to pricing on value rather than cost explains how to work this out.
• How often do prospects accept your quotes? If nearly every proposal is accepted without discussion, your prices are probably too low.
• Is the gap large? If you are a long way behind, you can move new clients to the new rate straight away and bring existing clients up in two stages over 12 to 18 months.

After this first increase, review prices every year. Small, regular increases are easier for clients to accept than a large one after years without change.

Which clients are likely to leave

The clients who object most to a reasonable increase are usually the ones who already ask for discounts, pay late and take up the most time. They tend to see your service as a commodity, and they are often your least profitable accounts.

Michael, a marketing consultant, spent weeks worrying about a 10% increase and expected to lose a large share of his clients. One client left and one asked to discuss it. They were the same two clients who regularly asked for discounts and made last-minute changes.

A recruiter I worked with had one client who took twice the time of any other and pushed back on every invoice. When she raised her prices, he left. The hours she got back let her take on two new clients at the new rate, which increased both her revenue and her profit.

Before you raise prices, list your clients and note which ones take a large share of your time compared with the profit they generate. If some of them left, consider what you could do with that capacity. A client scoring system makes this assessment more objective.

How to communicate the increase

How you announce the increase affects client retention as much as the size of the increase. The approach that works best has three parts:

1. Two messages. A heads-up around 60 days before the change, with no numbers, then a detailed notice around 30 days before.
2. Specific reasons. Tie the increase to what the client gets, such as faster response times, a new service, or a summary of what you delivered this year. Avoid general references to rising costs or inflation.
3. An exact date and a clear next step. State when the new price applies and whether the client needs to do anything.

The full process, with three letter templates you can adapt, is in how to communicate a price increase to clients.

Next step

Choose one service you know you have been undercharging for, set the new price, and draft the 60-day heads-up. If you want to know how far your pricing sits from where it should be before you decide, the Pricing Health Check gives you a picture in a few minutes.

If you run an MSP, the MSP Pricing Scorecard takes three minutes and gives you a score and a full report by email.