Let’s talk about pricing before Q4 does it for you. The final quarter is when we sell harder, deliver more, and work longer hours. If every sale is underpriced, you’re simply working harder to earn less. Back in May, we looked at real revenue versus nominal revenue and how costs creep in quietly. Pricing is where that creep either gets absorbed by you or covered by your business.
Here’s the number that should get your attention. In a classic Harvard Business Review analysis, McKinsey consultants Michael Marn and Robert Rosiello looked at the average economics of 2,463 companies. They found that a 1% improvement in price, with no loss of volume, raised operating profit by 11.1%. A 1% increase in volume raised it by only 3.3%. Their conclusion: price improvements can have three to four times the effect on profitability that volume does.
An important caveat: Marn and Rosiello’s math assumes you keep your customers, and it’s an average from 1992 data, not a promise about your business. But the direction is hard to argue with. Most of us spend our energy chasing more clients when a smarter price on the clients we already have would do more for the bottom line.
That’s what this month’s Featured Framework is built for: Pricing: A 3-Step Process to Raising Your Prices (Worksheet #7).
Step 1: Internal assessment. Start with honest questions. When did you last raise your rates? How often do you hear “no” on a proposal? If the answer is “rarely,” the worksheet’s gentle nudge applies: maybe your prices are too low. Then do the math. Add up every hour a service takes: delivering it, preparing it, and following up. Multiply by your billable rate. Then add the hours you spent selling it (proposals count!) at your internal rate, which is half your billable rate if you don’t know it. Add a 20% profit margin on top.
Here’s how that plays out. Take a workshop at $175 an hour with four hours to deliver, four to prepare, and two for follow-up. That’s ten hours, or $1,750. Add three hours of selling at $87.50 and you’re at $2,012.50. Add the 20% margin, and the workshop should sell for roughly $2,415. If you’re currently charging $1,750, you’re giving away your selling time and your profit.
Step 2: Market assessment. Name two competitors. Compare a similar service. Get specific about your differentiator, and ask what the market would pay at the high end and what would justify it.
Step 3: New pricing rollout. Name your hurdles (automatic billing, awkward positioning, fear of losing customers) and decide how you’ll explain the change to your team and to your customers.
Regarding that last step, Rice University marketing professor Utpal Dholakia offers three research-backed suggestions in HBR for easing pushback on a price increase: be direct rather than euphemistic, explain the real reasons, and frame the increase in terms of the value your customers receive. That’s your script. A clear note in November for a January start beats a surprise invoice every time.
This week, pick one service. Run the Step 1 math. Compare it to what you charge today. If there’s a gap, you now know what to do about it before the year-end sprint begins. If this all sounds very academic, it should! We aim to educate so you can professionalize your business and see results. Make it your own and execute!
You got this. We got you.
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SOURCES
Marn, M. V., & Rosiello, R. L. (1992). “Managing Price, Gaining Profit.” Harvard Business Review, September–October.
Dholakia, U. M. (2021). “If You’re Going to Raise Prices, Tell Customers Why.” Harvard Business Review, June.