- Pricing is one of the most powerful profitability levers that you can pull. A one percent pricing increase on the top line has a huge profit impact on the bottom line. Let's look at an example of a business that has a 20% profit margin. A one percent increase on the top line results in a five percent increase on the bottom line. Every penny of that one percent increase on the top will drop straight to the bottom. And that business will go from a 20% profit margin to a 21% profit margin.
That's a five percent increase in total profitability. You need to understand your rates relative to the market and be willing to take pricing when you have an opportunity to do so. If you don't, you're going to find your business falling behind in terms of your rates. When you do take pricing, be clear and confident. Have a solid rationale for taking pricing. That rationale can be as simple as, "Hey, it's been four years since our prices have increased. "We're moving to a level that's going to be more in line "with the broader market as well as in line with the value "that we know we're delivering to your organization." You can increase pricing by changing your pricing structure.
If you had a daily rate, maybe you can move to an hourly rate. If you have an hourly rate, maybe you can move to a daily rate. And as you make that switch, look for an opportunity to increase your total rate. If you charge by project, maybe you can charge by unit. If you charge by unit, maybe you can charge by project. For example, my firm does some executive coaching. In the past, we've offered these coaching services at an hourly rate. Recently we've looked at it and said, "Well, you know what, we're not getting what we want "with the hourly rate, so maybe we need to move "to a project base rate." We're now selling those engagements as long term engagements for three, six, nine, or even 12 months.
And in the process of doing so, we've been able to raise our rates versus that hourly rate we were charging. Understand your rate structure. Understand when you have opportunities to raise pricing and think about creative ways you can do it in a manner that is still consistent with the value you deliver to your clients.