What’s your ideal hourly rate? I bet it’s higher that you’re charging today, right? You should start charging that ideal future rate today.
Before I explain why and how first let me say that I strongly advise against charging by the hour at all. For a variety of reasons, this is a self-defeating practice. But whether you charge by the hour, or just use an hourly rate as a benchmark for quoting your projects (as you should), you might want to consider starting the process of increasing your rates today.
Now you’re probably thinking something like, “I can’t do that, my clients would object,” or “I’d price myself out of my market,” or “I’d lose opportunities.” And you’re probably right. Increasing your rate will require change and adjustment—it will take time. And that’s exactly why you should start this today. If you wait until it’s absolutely necessary to change your rates, you will no longer have the luxury of time–and changing your rates suddenly will create some serious stress.
In order for your creative practice to grow you need to maintain a healthy profit margin. And for freelancers and small firms this margin will come largely, if not entirely, from your hourly rate. Growing your firm will always add costs and increase overhead. And so your rates will have to go up. But increasing your rates will upset the pricing precedents you’ve established with your existing clients, and with your referral network. Significant changes to your rate may trigger exiting clients to start looking elsewhere and prospects to be surprised by your fees.
Nevertheless, increasing your rates is a necessary part of growing a professional design practice. And part of this progression will always include the acquisition of new (hopefully better) clients, and moving on from the old.
The Paralyzing Fear of Disappointing Clients
Transitioning clients is hard for emerging creative firms and freelancers. Creative people often feel the need to build close relationships with their clients. In fact, many small creative firm websites make this a selling point: direct communication, personal attention, no middle-man. These are often touted as advantages in hiring them as a freelancer or small firm. But eventually your costs will go up, and rates will have to increase, and clients will transition.
At a personal level this is hard for a creative, because it’s not just business, it’s not just about necessary rate increases—it’s knowing that your client Jane, with the twins, trying to run her gift shop, or Joe the semi-retired granddad managing a non-profit—that they will be negatively affected by your increase. And those are the hardest transitions. But of course you also probably have clients who can afford higher rates, but knowing a bargain when they see it, they keep you busy with lots of work—so long as they keep benefiting from your low rate. I hate to put it this way, but these kinds of barriers to building a successful creative practice come from the reality that most creatives are just too nice.
The solution, or course, is not to be mean, or hard-nosed, but to simply become more professional. Professionals can be very personable and nice. And if you can become more professional (which requires being profitable), then you can continue to help the entrepreneurial mom, or the altruistic granddad. If you are genuinely profitable then you can afford to willingly cut your profit margin for clients like these. But you need to be a profitable first in order to have the time and money to give away (or discount). You can’t keep giving away what you don’t have—working at unprofitable rates will eventually catch up with you. When it does, these clients will be equally disappointed—when you go out of business. If you’re going to remain in business you’ll need to increase your rates.
And you need to do this proactively, intentionally, and in a planned way.
Timing is Everything
If you wait on raising your rates until the moment you really need that extra profit margin (from having hired an employee, or adding overhead, or experiencing increases in your personal expenses), you will be way behind the inevitable transition curve that this change will require.
Operating with higher costs but still doing business sold under the old rate—will put serious financial pressure on your firm. Pressure that might cause you to hesitate even longer to raise your rates. This is a downward spiral that has lead to the closing of many good creative firms. You need get out ahead of this curve, especially if expansion is in your future—either personally (mouths to feed) or professionally (adding employees). You can’t wait until you must raise your rates to raise them. It can take a year or more to adjust your clients to new pricing structures. Some clients will adapt, some will leave, and some will be added, but not overnight.
Planning ahead is absolutely key for growing your practice. And planning for the jump from freelance to firm is one of the biggest changes to anticipate. Freelance rates tend to get pegged well under the $100 per hour mark. A creative firm, on the other hand, should be charging $100 per hour at the bare minimum. So if you are freelancing and considering hiring help, you should raise your rates to at least $100 per hour well before you actually bring on your first employee. If you wait until after you hire you’ll be at least a year behind the transition curve—and that will be a very stressful year. Rather, increase ahead of time and use the added profit from that increase to build a cash cushion that can be very helpful in making a transition from freelance to firm.
How to Bring Your Clients Along
Some of your clients genuinely will not be able to pay higher fees. You may be able to keep a few of these, but you must count this cost and deem them worthy of your altruism. By keeping them you will quite literally be subsidizing their work from your profit margins. If your client is a dear friend, or a cause you want to support, and you can afford to provide that time or money, then you may want to keep that client. But do not think of them as doing you a favor—helping to pay the bills, or keeping the light on. They are draining your profits, not providing a foundation.
By all means, be generous and give to them, if you have it to give, and want to do so—but do not consider them as a base, or a building block.
Some of your other clients are bargain hunters and will not pay your higher rates or fees. When you raise them, they’ll start looking for someone cheaper. Don’t feel bad for that client. Part of their cost in hiring the lowest bidder means that they have to live with a lot of change.
Freelancers regularly move on to full time employment, or start firms that charge more. In the early stages they work cheaply, but the client who won’t grow with them simply has to get used to continually finding new creative resources. These are clients you don’t want.
On the other hand you may also have clients that do want a stable relationship with your firm—a relationship they can count on. They value your firm as a partner that knows them well and they know this kind of quality partnership comes with a higher price tag—and good clients are willing to pay it. These will see that your growth as valuable to them, and they will happily pay more knowing that you will be around to help them for years to come.
And some of your clients will be in the middle. Not real happy about higher fees—perhaps not recognizing the value behind those fees–but willing to stick with you and pay the hire rates. In each of these cases you can make your rate transition smoother by planning ahead and communicating your goals proactively. Here are a couple tactical ideas for moving in this direction.
1. Be upfront about your goals at the outset of a new client relationship. When you bring on a new client let them know that you intend to grow and build your professional practice into a strong firm. Tell them your general expectation on time frame. And tell them that you intend to raise your rates or fees along the way as necessary. Be frank. Let them know that you don’t expect every client to transition with you, but that you will provide plenty of advance notice of changes and try to make any changes as smooth as possible. As a gauge you might want to say something like, “I intend to raise my rates about $5-$10 per hour for every employee I bring on,” or “You can expect a 5-10% increase in my rates annually.”
2. Explain the benefits to them. If you have not raised your rates in a planned and incremental way, and now find yourself facing your need to make a significant jump (say more than $25 per hour from your existing rate) you may want to send your clients a letter explaining your business decision and underscore the value they will receive from the ongoing stability of your firm. Here’s a sample letter you might use.
_____ [Creative firm] has been working with you for ___ years. Thank you for your business! It is clients like you that have made our growth possible and enjoyable. As I have evaluated the profitability of our firm I have come to recognize that our continued growth requires an increase in revenue across our entire client base. Growing from my freelance practice into small firm has introduced roles, functions, and overhead that simply require greater margins to sustain us. As a fellow business owner I’m sure you can relate. We hope that all our clients will see the value of maintaining a strong design partnership with ____ and see our growth and strength as a company as a long term benefit to your brand.
Starting on ____ we will be increasing our rate from _____ to ____. We understand that some of our clients may need more time to reallocate their marketing budgets to cover our higher fees. Since you are a valued client to us, if you need time to adjust your budgets please contact me and we’ll see how we can make temporary accommodations for you.
We realize that not every client will be able to afford our new rates, we hope you are not among that number, but if you end up deciding to make a change please know that we will cooperate with you in order to make the transition as smooth as possible.
Building a growing professional creative practice will require increasing your rates. Far better to plan for this, build it into your client development process, and lead your clients along then to wait until lack of profitability requires unplanned and significant jumps. Don’t be afraid of this natural progression. By being upfront and proactive with your clients in this regard you will not only make the transition easier, it will position you in their mind as an even more competent and professional designer.
So what are you waiting for? Start increasing your rates today!