Increasing pricesNow IS the time to increase prices

At no time since the Great Depression has downward pressure on prices been so great. Much of it stems from the disruption caused by Covid 19. There are other sources as well.

The overwhelming purchasing power of retailers, such as Coles and Woolworths, which pressure suppliers (our clients); the Internet, which gives transparency of markets by making it easier to compare prices; and the role of China and third world countries whose low labor costs have driven down prices for manufactured goods. These have all combined to attack our clients’ pricing.

So does that mean our pricing should also decrease?

Many designers I have spoken to in recent months have suggested they should cut prices to retain clients. I think it’s the opposite. We should look to increase prices.

The starting point is to look at the real cost of doing business without the inflated revenue we are now getting from Job Keeper. This process also raises the question about staff numbers and the number of working days.

It would be an interesting exercise to prepare a few pricing options based on a slimmed down team working fewer days.

Once you have established the real cost of running the studio it’s a matter of working out the value you add and increasing prices to reflect that.

Increase prices one percentage point at a time

Getting pricing increases right is the fastest and most effective way for a design business to increase profits. In a Business of Design week masterclass we ran last year we showed how a six person studio can increase their charge out rate by 2.5% and add 12% to operating profit.

Putting some hard figures on that; if you charge out at $150 per hour the 2.5% increase is $3.75. Would a client notice that you have added $37.50 (let’s call it $50) for a 10 hour project? Not likely.

Interestingly, this cuts both ways. A decrease of 2.5% in average prices has the opposite effect, bringing down operating profits by a similar range. Business owners may hope that higher volumes will compensate for revenues lost from lower prices and increase revenue hardly ever happens. Research by McKinsey concluded:

A strategy based on cutting prices to increase volumes and, as a result, to raise profits is generally doomed to failure in almost every market and industry.

What’s your pocket price?

How much actually ends up in your pocket?
What price are you really charging after leakage?
How is productivity adding to that leakage?

I have observed many design business owners develop very sound pricing approaches but then miss out on the full impact because of leakages.

A sound pricing approach should also look at the briefing and debriefing process based on solid stats from a job management system.

How many hours were really used in doing the project?

Many studio owners I talk to price on value and say examining hours is not necessary. But that is where the leakage occurs. If we treat our team ethically we don’t expect an endless work week. There is a set number of hours we expect to get output in a week and the team members expect to get a set pay. Hence you have an hourly cost rate. That’s why you need to develop your pricing with consideration for productivity.

Takeaway

Increase prices by examine your pocket price and productivity. Then set an approach to increases pricing by 2.5% every six months.

Greg Branson

Want one on one mentoring that will grow your business.

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Pricing is a global issue

Apart from getting the design right, honing your costing and pricing is probably the most important part of running a design studio. Firstly it’s important to define the difference between job costing and job pricing.

Cost on hours sell on value

The only way to make more money is to sell more hours. To do that you need more people, and on it goes. It’s just not sustainable.
That’s why it’s important design studio owners cost on hours and sell on value.

Dealing with price sensitive clients

There are a number of things to consider when working out how to handle price sensitive clients. The first stage is to understand how clients make decisions about choosing a designer.

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Greg Branson

Greg’s passion is the research and development of methods that improve design management and the role of design in business.

Greg has developed The Design Business School to help owners manage their business better along with showing designers how to get more involved in the studio and develop their career path. Contact Greg.

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