Posts Tagged ‘day rates’

When negotiating with prospects, you will sometimes come across the ‘Day Rate Apprehensive’ customer.

Generally, such customers will demand to know your day rate (even if you intend to quote a fixed price project), and will make all kinds of ‘ohhhhh’ or ‘hmmmmm’ noises, and will try to get you to drop your day rate down.

How should a freelancer, contractor or small business owner deal with those demanding a reduction in your day rate?

I have found the best way to keep the rate the same whilst still winning the business is to make them realise that negation on day rate has absolutely nothing to do with the price they will end up paying.

My two suggestions are:

Option 1 – The Duration Equation.  In this discussion, yes, the day rate is indeed one side of the equation.  BUT, so is the duration – how long the project will take to complete.  Talking about a day rate without considering the effect on duration is a zero-net equation.  As the day rate drops, so the duration will increase to balance out the work cost (even if you actually spend the same real time doing the work, and the slack time working on other projects).

Option 2 – The Quality Equation.  In this discussion, you may be asked to talk about the day rate but also talk about the duration – in which case the final part of the equation is the quality.  This is like haggling over the cost of apples; you may get the same quantity of apples for 4p each rather than the premium 20p apples, but they will be bruised or rotten.  If just getting a cheaper apple is the ONLY goal, then a cheaper cost per item is a quick win for the customer – but will either of you be happy in the end?  No!!!  This is the negotiation to be having with your prospect – a cheaper day rate for the same duration may involve a less skilled (outsourced to a lower skill level) freelancer or overseas development house, which in the end may mean a lower quality delivery, which will then cost more with fixes and problems.

Remember, when you offer a service, you can offer it delivered quickly, cheaply and for the delivery to work – but your prospect can only pick two out of the three.

When your prospect demands all three (and a low day rate), they are really asking for a sub-standard delivery which will cost somebody (either you, or your prospect) more in the longer term.  Unless you are really desperate for work, it could end up being you who pays the additional cost, so this is a prospect you should be walking away from.

When they baked your cake in little slices,
Kept your eyes on rising prices,
Wound up winning booby prizes;
I’m sure you’d like to think you know what life is

Lyrics from the Song “Valentines Day”, By ABC

Rising your freelance or small business rates can seem like a double edged sword.

On the one hand, inflation means that your costs are going up and therefore you should be charging more to maintain your profit level.   On the other hand, it may seem like there is a risk that by increasing your prices, it will make selling harder.

But then, if you are selling based on cost, there will ALWAYS be somebody willing to do it cheaper.  So are these the sort of clients you want to be attracting anyway.

Whilst it may be tempting to put off rate increases in these troubled times, delaying a rise could be the worst thing you could do.

Small Verses Big Rises
Inflation in the UK currently stands at around 3%, and at around 1.7% for the USA.

The rate of inflation seems to always be in the news at the moment – everybody knows that prices are rising because of inflation.  Therefore your customers will know that your prices will be going up (whether they admit it to you or not).  A letter of pending rate increases in line with inflation should be relatively easy for your customers to understand.

But, let’s assume that you decide to skip the rate rise for 2012 because you don’t want to hurt sales.   Come 2013, you could increase your rates by the rate of inflation, but that means you’re effectively taking a pay or profit cut.   Do this enough times, and you will soon be out of business.

On the other hand, if you find in 2013 that you need to get your profit levels up to the previous levels, you are writing a letter with your rates up by double the rate of inflation.

You customers will soon forget there was no rate rise in 2012.  You will have customers dropping off of your pending work book faster than you could deal with.   Imagine if you got a letter from one of your utility providers saying that their prices were going up by 6 or 7 percent – you would soon be shopping for an alternative supplier.

Get The Rise In the Diary
I would therefore encourage you to get the rate rise dates set into your calendar as reoccurring yearly events.   I have two dates in my diary for each year:

1. 26^th June – I write to all my current, old and prospect customers with the new rates, stating they will take effect from the 1^st September.  I find this is normally a good way to spur them into raising the orders.
2. 1sth September – Is the date of the rate rise.  I update my price list on my accounts system (Freeagent), my web sites and my printed material.   I also mark any outstanding quotations as void in my accounts system, so that I do not accept quotations with an old out of date value by mistake (good housekeeping in itself).

These dates are in stone.   It’s in my contract, and my customers are used to the dates.  Come the end of June, they know that a rate rise in line with inflation is on its way.

A good source of rise letter
Of course, there is a fine art in creating a rate rise letter.   I find the two stage approach (warning letter followed by the actual rise) works very well and rarely scares off prospects or customers.

Whilst the format of the rise letter is a topic for another time, there is an excellent resource of wording for such letters on the Intuit money form.

Inflation is up (again), and by all accounts, is going to continue to rise for the foreseeable future.   Of course the problem with high inflation is that it automatically devalues both the money in your pocket, and the money you bill your customers.   A loaf of bread today may cost a pound (or dollar) today, but with inflation at 4%, it costs £1.04 next month/year.   Flipping this on its head, if you charge £100 today, next month that £100 may be worth £97 in real terms.   This is why it’s important to regularly review your day rates and price of products, and uplift them with (or around) inflation.

At a time when everybody is cutting back on spending, it is easy to feel that a rise in prices is the last thing you want to do.  I know myself that whenever I get a letter saying prices are going up, I think about whether I really need the product or service, and always cringe when I have to put my own rates up.   But if things are done well, the process of putting up a price can actually generate more money. 

Regular Rate Reviews
One of the first principles is for regular reviews.   People hate change, but worse is unexpected change.   If your customers expect a rate review in March every year, when March comes around it won’t be so much of a shock.   In reality, your customers will not plan their life around your schedule of course, but at least when you do a rate rise it will be the same time every year so looks fairer than say a rise because you feel like it. 

Advanced Notification
When you raise you rates, don’t email or write to your contacts with a ‘I have put my prices up’ statement.   This gives the customer no opportunity to react to the rate change – it will feel forced on them.  Instead, give them some notice that rates are going up on a date in the future – 3 to 6 months is a good period of time.   Don’t forget to include in your communication, the fact that the rate increase is because of your own rising costs, you are forced to review your prices, and the rise is in line with the annual review schedule. 

Spend Now and Save
The big win is the ‘spend now and save’ option.   In my rate rise letters, I always point out that all quotations will be valid for the next few months until the rise takes effect, and any new quotations will be honoured at the old rate where orders are received before the date of the rate rise.   This sends a ‘spend and save’ message to your customers, and can make them re-review any outstanding quotations or think about any work they may need before the rate goes up.  Depending on the number of customers you have and the amount of the rise, this can be a strong call to action which can generate a sudden rush of new work. 

Staggered Customer Rises
Now not all customers have to have the rate rise at the same time.  In case this does have the desired effect to draw in more work, it may be worth having two rises in the year – with different customers having the rise at different times.   Its also worth thinking about, for really good customers, putting them on the 2^nd round of rises, giving them more notice with a ‘because you are such an important customer, we are delaying the rise as long as possible for you until….’ statement in your communication.   This will send a feeling of importance to them.