Owners who are thinking about raising their prices usually picture the same thing: clients reading the notice, deciding it is too expensive, and leaving for someone cheaper. That expectation keeps many service businesses on the same prices for years.
In the price increases I have worked on, the outcome is usually different. This article describes what tends to happen to your client base, to the way clients behave, and to your profit, and how to test a new price before you apply it across the business.
Fewer clients leave than you expect
When an increase is reasonable, explained well and linked to what the client receives, clients usually stay. Many of them have been expecting it, particularly if prices have not moved for a few years and their other suppliers have already put theirs up.
An IT service provider I worked with had not changed its prices in four years. It put through an 8% increase and kept every client. Combined with some cost savings, profit rose by 43%. The full MSP case study shows how it was done.
How you announce the change has a large effect on who stays. The process, with letter templates, is in how to communicate a price increase to clients.
The clients who leave are usually the least profitable
The clients most likely to leave are the ones who chose you because you were cheapest. They are often the same clients who negotiate every piece of scope, ask for work outside the agreement and pay late. When they go, the revenue you lose is usually smaller than it looks, because the time they took up is freed for better-paying work.
If you want to see in advance which clients are at risk, score them. This client scorecard shows how, and what to do with the accounts that score badly.
Clients often treat you differently
Price is one of the signals buyers use to judge quality, especially for services they cannot easily assess before they buy. A consultant at £8,000 is assumed to have more experience than one at £2,000 for similar work, whether or not that is true.
In practice, businesses that move their prices up, and describe their work in terms of the client’s results, often find clients question their recommendations less, ask for fewer time reports and act on advice more quickly. The clients have made a bigger commitment, so they want the work to succeed.
This only holds when the price is backed by the service. A higher price with the same vague proposal and the same delivery invites closer scrutiny. The article on positioning your services as an investment covers how to describe your work so the price makes sense to the client.
Example: an SEO agency that moved from £2,000 to £10,000 a month
An SEO agency I worked with recently charged its clients an average of around £2,000 a month. The work was good, but the agency never connected it to what each client gained, so clients judged it on the monthly fee.
We changed how the agency described its value. Its proposals now set out the outcomes for the client and what those outcomes are worth in pounds, so the client can see the return before they sign. The agency also moved to a revenue share model, where part of its fee is linked to the revenue its work generates for the client.
Shortly afterwards, the agency signed its first client paying more than £10,000 a month. The SEO work itself was much the same. The difference was that the client could see what it was worth.
Profit rises faster than the price
In a service business the main costs are people and overheads, and they do not change when you raise prices, so nearly all of the increase goes to profit. For a business with a 15% margin, a 10% price increase with no client losses raises profit by around two thirds. The business could also lose around 9% of its revenue from departing clients and still take in the same revenue as before, from fewer clients. The worked example is in how to raise prices without losing clients.
How to test a new price before you commit
- List the results you delivered last year. For each client, note what changed for them: revenue gained, costs cut, time saved or risks avoided. Use numbers where you have them.
- Describe the outcome you deliver. “Better marketing” is vague. “Forty qualified enquiries a month” is specific enough for a client to value.
- Put a value on the outcome. Estimate what the client’s problem costs them today and what solving it is worth. This gives you a reference point for the price. The guide to value-based pricing explains the method.
- Try the new price on new prospects first. Quote it in your next few proposals and watch how prospects respond. Adjust the price or the way you describe the work before you change anything for existing clients.
- Move existing clients across. Give notice in two stages and connect the change to the results you have delivered together and what comes next.
Next step
Choose one service and write down the outcome it delivers and what that outcome is worth to a typical client. Compare that figure with what you charge. If you want to see how far your pricing sits from where it should be, 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.
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