Inflation and Pricing

The standard rate for most anything done by the business I’ve been part of since 1996 is $80 an hour, and has been the whole time.  We actually had tiered pricing of $80, $100, and $125 at one point, for development work, depending what type.  In practice, $100 was the most we’ve charged, and that was in 1998 and 1999.

The big client has always gotten a discount of $5 for the first 15 hours a week, which later changed to 60 hours a month, effectively giving them still more of a break.  Anything after that gets a discount of $15.  Since this was predicated on volume, obviously the discount should go away, and will as of next month, when to the extent I still work for them, I expect to make them a client of the new business instead.  The discount was also based, I always mistakenly though, on our getting a discount on the office space we, in effect, rented from the very client.  It’s really a realty trust distinct from the client, but the same owner applies to both, and the same manager runs both.  It was only a few years ago I discovered our rent was not discounted for the building, reasonable as it happened to be.

I’ve long thought we needed to increase our rates, while at the same time there’s been a certain amount of downward pressure, which translated into staying the same.  My calculation a few years ago, based on an assumption of certain expenses, how much I really needed to make, and being able to keep up on technology, buying and trying new things and so forth, was that I needed to be charging $95 an hour for computer support related services.  Note that it is as normal for rates to be right around $100 as it is for them to be down where we’ve been all this time.

Last night I was wondering what the number would be if adjusted for inflation.  Today I remembered that and located an inflation calculator.  2006 Is close enough.

$80 In 1996 is $102.38 in 2006, according to that.  Sounds about right.

I’m trying to decide what my new official rate will be, for undiscounted, unpackaged, open ended hourly work.  You always see stuff on how bad it is to underprice, and I can vouch for that.  If you don’t charge enough to stay in business and stay current at a relevant volume, that does neither you nor customers any favors.  If you charge too little, you present yourself as a cheap hack who might or might not be worth the savings. 

At $80 I’ve gotten a curious mix of responses over the years.  More common is the indignant ”how much!?” Almost as common, and so refreshing, is the matter of fact “but of course, that is what computer people charge.” The biggest problem I have charging a lot is that if I were on the hiring end, I’d react closer to the former than the latter.  That’s a dangerous thing when it comes to pricing; not appreciating the potential value of your own work, and not being able to disregard the people who think you’re overpriced, despite that you shouldn’t want them as customers anyway.  It leads to things like charging $80 on paper, but only charging for half the time I actually put in.  Then being unrecoverably angry when the person on the receiving end of the misguided and unadvertised favor still thinks it’s too much.

Of course, the plan is to offer plans, or something, effectively making the official rate not what gets charged most of the time.  It can be plenty high, as a starting point from which I’m computing and discounting as part of product packaging and marketing.  I don’t mind so much charging $75 an hour if I’m doing so as part of a prepaid ten hours, for instance.  About a quarter of what we ever billed at $100 was never collected, so not much difference and the money is there up front.  There’s also a difference between being able to e-mail someone a quick reply to a question right from my home office, or help with a quick call, and having to pack myself up and drive ten or twenty miles to troubleshoot and fix things on-site.  To me, what I’m tentatively calling “Anywhere Answers” are worth discounting and considering marginal revenue gravy.

But I digress.  The main point was what a remarkable difference it makes over, say, ten years to apply even what we perceive as remarkably low inflation.  It’s not the only factor, certainly; there’s competetive pressure, market, productivity and cost changes.  It’s still worth a look.

1. Jay, interesting discussion.  I have the same quandary--and I’m a professional economist.

   A few thoughts:  nobody outside your family cares about how much you NEED to make.

   If no one’s pushing back on your price, then your price is too low.

   When I raise prices, I usually protect my existing clients.  This makes a price hike an experiment.  If I get too much price resistance from new clients, I quietly revert to the old price.  (Have not had to do that yet.) Downside is keeping track of what I charge whom.

   Something to think about: the real money is made from products that get you out of the hourly rate grind.

   Posted by Bill Conerly  on  04/27  at  03:20 PM  from  Lake Oswego, OR
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