NOW is the time to increase prices

Not since the Great Depression has downward pressure on prices been so great. Some of it stems from the disruption caused by Covid 19 but there are other sources as well.

These three things have combined to attack our clients’ pricing:

• the overwhelming purchasing power of retailers, such as Coles and Woolworths pressuring suppliers (our clients)
• the Internet, delivering transparency of markets and 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.

So does that mean our pricing should also decrease?
No.
Actually they should increase.

Many designers we’ve spoken to in recent months have looked at increasing prices. I think it’s a no brainer.

The starting point is to calculate the real cost of doing business. 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’ve 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. A few years ago in a Business of Design week masterclass we demosntrated 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. 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?

We’ve seen 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?

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

This is just a grab of some of the ways you should look at your pricing. We’ve recently uploaded a recording of one of our most popular Lunchtime Learnings – Spilling our guts on pricing.  It’s a 101 tutorial on pricing complete with a practical action plan. Full details are here Lunchtime Learning recording Spilling our guts on pricing.

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.