Hourly rate - advice needed

[Organ Grinder]

Hi, I'm a new member and looking for somewhere to share my frustration. My situation is that I'm self employed (I work from home) involved in architectural design and I work with a small team team of other self employed designers on very large projects. This set up has worked very well for over a decade. My problem is that I have learned recently that an old work colleague (John) has set up a design business and has five employees, which charge an hourly rate which is over 30% the rate we charge, and have been doing very well for years. My frustration comes from pointing out to my work colleagues that we are too cheap - but their thinking is that we can't charge more and the higher rate charged by John is fair because their overheads (office rental, national insurance etc.) are higher. Am I wrong in thinking there is no reason as to why we shouldn't charge the higher rate?

 

[Newchodge]

Of course you're not wrong. But if your colleagues don't want to charge more you have a choice - continue with them, or don't.

 

[AllUpHere]

Of course you're not wrong.

You can't possibly know that from the information provided. Just because someone else charges more, doesn't necessarily mean you can charge the same. Their marketing may be better. They may have targeted clients with a view to charging the higher amount in the first place. If you simply put your prices up in line with your competitors, you'll have a shock when you find out your clients are more price sensitive and leave.

Edit. I presume you mean charge an extra 30%, and not over 30% of what you charge, as you've written?

 

[Organ Grinder]

You can't possibly know that from the information provided. Just because someone else charges more, doesn't necessarily mean you can charge the same. Their marketing may be better. They may have targeted clients with a view to charging the higher amount in the first place. If you simply put your prices up in line with your competitors, you'll have a shock when you find out your clients are more price sensitive and leave.

Edit. I presume you mean charge an extra 30%, and not over 30% of what you charge, as you've written?

I meant we should be charging the same or closer to the higher rate that John charges.

I agree it would be foolish to simply up our rates instantly. I would only increase the rate to new clients and gradually increase the rate with our existing client base as new contracts are negotiated.

 

[Mr D]

I meant we should be charging the same or closer to the higher rate that John charges.

I agree it would be foolish to simply up our rates instantly. I would only increase the rate to new clients and gradually increase the rate with our existing client base as new contracts are negotiated.

Unless you know for certain from your customers about the impact of raising your prices then you don't know if you can raise your prices.

At some point, in the fullness of time, you will raise your prices anyway - or go under. Your costs will, over time, tend to increase so at some point you raise your prices or cover extra costs from profits. Until there are no more profits.

Nothing to say you must match someone else's prices. However a few percent increase every once in a while may work - or you find out you have gone too far with those customers.

 

[Mark T Jones]

My favourite definition of the optimum price is 'the price at which your customers complain but still pay'

 

[Maxwell83]

If you and John have the same customer base, and you know that the market supports John's prices (do you know his business' figures?), then you need to find out what exactly John offers that you don't and how this impacts the customers' willingness to pay that price.

The customers don't care about John's overheads at all, but they may care about the benefit to them that his overheads allow him to provide. E.g. I don't care if my supplier has a high rent on his property, but I might care that he has a central London address that allows him to deliver to me in 30 minutes when the cheaper supplier is next day delivery. It Isn't the overhead I am willing to pay extra for, its what that overhead means for me that allows me to justify the higher price.

Find out what the market demands in order to pay that higher price, and work out if you can position yourself to provide that, charge the higher price and (importantly) if you would be more profitable. Its possible that after looking into it, you may discover that you would have a higher cost of providing the service, so even after the price increase your margin would be lower...

 

[HomeWrking]

Is this a husband and wife team - because I the wife always tell my husband to be charging more for his work!

 

[Organ Grinder]

The service we both offer is exactly the same. The industry we work in is fairly specialised, and most employment is through word of mouth. I used to work in the same office as John, where we were both involved in the same type of work.

Our clients are the same or very similar (in fact my current client was desperate for more designers, which is why I contacted John in the first place).

There is no issue of delivery of products as all design delivery is electronic (email or via a main project drawing management site).

Is this a husband and wife team - because I the wife always tell my husband to be charging more for his work!

I wish I was working with the wife as she seems to have a better head for business than my colleagues!

Thanks for all your responses - its helped to keep me sane.

 

[Maxwell83]

The service we both offer is exactly the same. The industry we work in is fairly specialised, and most employment is through word of mouth. I used to work in the same office as John, where we were both involved in the same type of work.

If that is the case, then your plan sounds like something I would be trying in your shoes - i.e. putting up your prices when you quote new clients, and going forwards incremental increases for existing clients on future contracts.

 

[DavidWH]

Are you making enough money?

How do your prices compare to other companies doing similar work?

Ignore what John is charging. John is one of many people, with offices & staff to pay.

If you find that most companies in your industry are charging £40 an hour, and you're only charging £30, sure stick another £5 on it. Customer can shop around and see you're still competitive.

Your low overheads are your benefit, not the customers. John decided to open an office and employ staff. Doesn't mean you should be selling yourself short though.

 

[HomeWrking]

The service we both offer is exactly the same. The industry we work in is fairly specialised, and most employment is through word of mouth. I used to work in the same office as John, where we were both involved in the same type of work.

Our clients are the same or very similar (in fact my current client was desperate for more designers, which is why I contacted John in the first place).

There is no issue of delivery of products as all design delivery is electronic (email or via a main project drawing management site).



I wish I was working with the wife as she seems to have a better head for business than my colleagues!

Thanks for all your responses - its helped to keep me sane.

The wife is the best account manager, financial director, credit controller you can have Just bear with the reminders and don't call it nagging!