Pricing seems to be an issue with many of my clients at the moment. I’d like to share a story about a company I used to run and how we managed a successful price increase.
The Challenge: unprofitable services
We ran IT and telecoms services for clients on a revenue share basis. That is, we helped them market and sell the services, and we got a share of their revenue.
It was a small share. Generally 20% or less. But for successful clients, that was fine. If your client makes $100,000 a month and you make $20,000 (or even $5,000) from that client, every month, you’re making good money.
But we had a number of clients who were not making much revenue. 20% of $300 is only $60. That didn’t cover the cost of our time in invoicing and client care – let alone contribute to our IT and office overheads.
The Solution: a price change to avoid unprofitable services
So we decided to introduce a minimum service charge. $100 month per service that we were running. The number was a stab in the dark at how much it took us to process and track payments, troubleshoot IT issues, and so on. It was almost certainly an underestimate. But it was a big change for us and our clients. And it was an affordable amount compared to our competitors.
My Head of Sales was really unhappy about this minimum charge. He was afraid that everybody would leave. But we needed to cover our costs. So I over-rode his objections.
The Process: communication and negotiation
Communicating a price change successfully and carefully is a large part of the battle.
We announced that for every service where our revenue share was not $100 per month, we’d bill a $100 minimum fee.
- The communication went out in advance. Clients had 2 or 3 months warning.
- We explained why we had to do it. That included listing the kind of work we were doing to support them every month.
- We invited them to discuss any concerns with us directly.
How small and medium clients reacted.
Two or three very small clients got very upset. Two or three very small clients left. We were losing money on their services, so I wasn’t exactly heartbroken.
Most of our small to medium clients accepted the charge with no fuss. They might not have liked it, but they knew it was what we had to do. And we were still affordable.
What about our most important clients?
We had two big clients. We needed to keep these clients. Before we announced the pricing changes, we had discussed how they might react. We’d agreed that if they complained too hard, we’d be happy to waive minimums for them. But that’s not what happened.
Our second biggest client
This client was a private business owner. She had lots of little services. She was going to incur minimum fees on those services,
but she had some big services which made lots of revenue. Several hundred thousand dollars each month.
She complained that we were making so much on those big services, it wasn’t fair to bill her minimums on the other services.
We were ready to back down – if we needed to. But we didn’t do it straight away. We negotiated.
We said “We understand your position. But from our perspective, you’ve got lots of services, which means a lot of admin and support for us. How about instead we just charge you a fixed account-wide management fee to cover our admin costs?”
She agreed to a fee of $2000 a month to manage her 40 or 50 services.
We gave her a better deal than the standard one, but she still had to pay more than she used to. So why did she accept? Three reasons.
- We justified our pricing.
- She got certainty about her monthly costs.
- And we showed we valued her by negotiating and giving her a special deal. In her mind, she won the negotiation. Yet we still made more money from her than previously.
Our biggest client
This listed company was also running about 40 services with us. Several of these were huge in revenue. There were lots of little ones where they were experimenting, selling new things, seeing whether those worked and so on. Most of those would incur minimum charges, most of the time.
This client didn’t come back to us at all about the new charges. They accepted the fees just as we announced them. It was only two and a half years later, when they got a new CFO, that they decided they didn’t want to pay minimums. At that point, we renegotiated.
The Result: Increased profit
In the year after we introduced the minimum fee, it generated $100,000 of additional revenue.
Remember, we had no additional costs. We just changed the way we priced existing business.
So that $100,000 of revenue translated to $100,000 of bottom line profit.
The Moral: Don’t be afraid of price changes
Yet so many companies are afraid to introduce price increases.
It’s especially true for small companies where the person who decides the price is the same one who speaks to the customer. There’s no one else to blame it on. The customer may know you have decision authority, so it’s easier for them to push back.
But ask yourself:
- Are we delivering good work?
- Can we justify the price increase?
- Are we competitive with like services? (Not similar but lower quality services, but like services!)
If the answer is yes, then believe in yourself and go ahead with the price increase. Just make sure you communicate your price changes in the most effective way you can.