Raise your rates and invest wisely

by May 3, 2021Strategy & Planning

If you can’t hire fast enough to meet demand, raising rates is an excellent way to filter out lower-value projects while still boosting your bottom line. If you’re billing less than $150/hr in the U.S. it’s probably time to raise your rates. Reinvesting proceeds from rate increases into your people will help insulate your shop from the hiring challenges that seemingly everyone’s facing.

Compare your pricing

Purchase a custom distribution of pricing levels just like the graph below based on your specific service mix, size, and location.

Average rates

Over the years we’ve compiled a sizable amount of pricing data for digital service shops. Because everyone’s size and service mix differ so greatly, we’re looking at self-identified agencies in the United States for this comparison. We are also focusing on advertised rates rather than try to discern any kind of actual hourly rate due to discounts, hours tracked, etc. Back in 2019, most shops were billing in the $100 – $149 range. In 1Q 2021, the vast majority (70%) of these shops in the U.S. still priced their services in the $100 – 149/hr range. While a $50 range is fairly wide, this indicates that even after the greatest shift to digital ever, the companies enabling the transformation have yet to raise prices.

Higher turnover
+ difficulty hiring
+ fuller pipelines
= higher prices

Turnover at digital shops, specifically for high-level positions, has increased significantly this year. In our 2021 Outlook Report we saw shops expect to grow their FTE headcounts by ~20% this year. This rise in turnover is going to make it much more difficult to hit that goal. If shops aren’t able to get the right talent in place to service the expanded demand, their revenue growth targets could be in jeopardy.

In conjunction with the higher turnover, hiring’s obviously more difficult and we went into some detail about that in our previous post: Why would anyone want to work for you? It’s become critical to get your culture and people-ops in order because that’s essentially your only option when other firms (funded startups, large brands, etc.) can outspend you.

“We’ve had two Director-level employees leave and we haven’t been able to replace them.”

Founder

18-FTE design shop

“We’re seeing developers get poached for 1.5 – 2x their current pay.”

Investor

Early-stage VC

“We posted another 3 job postings on top of the 4 that haven’t been filled since January.”

Founder

12-FTE dev shop

While you’re dealing with new staffing challenges, pipelines are fuller than they’ve been in recent memory.

“We’re writing 3-5 proposals a week and I don’t expect to slow down any time soon.”

CEO

56-FTE digital marketing agency

“At the end of the first quarter we were already 79% to our annual new business goal.”

Owner

32-FTE web-dev shop

“I’ve been so slammed with quotes we’re trying to bring on multiple salespeople to handle it.”

Director

17-FTE digital agency

Stop discounting

Even in this environment, we came across a few instances of sales teams at digital shops offering discounts for new business. We were concerned about how widespread this was, seeing as how it’s exactly what we advised against in our pandemic guidance. We did a quick survey and found that while just under half the respondents offered discounts during the pandemic, none were still offering them as of April 2021. If your sales team is still offering discounts to win business today, it’s time you had a chat.

Invest and position wisely

After raising rates, you can capture some of the price increase in profit, but most should go to culture, retention, hiring, and salaries. If you don’t invest here any gain from higher pricing will be short lived. We are expecting this hiring war to take a while to settle. The extreme turnover and poaching should quiet down over the next few quarters as the demand:staffing imbalance reaches a new equilibrium.

Once salaries rise, that becomes the new base level. Some of this can be offset by a better working environment / culture but while that’s something the industry has been great at marketing, it has struggled actually implementing. This is evidenced perfectly by the recent fiasco at Basecamp, a company who literally wrote the book on remote work and culture. This should create a general shift of employees away from poorly managed environments. These kinds of trends tend of have a greater effect on higher-level talent vs. entry-level talent. In general, this will cause the poorly managed shops to rely on less experienced talent which precludes them from participating in the more complicated (lucrative) projects.

This provides an excellent opportunity to position your shop for work appropriate to the level of talent you’re attracting. E.g. if your culture and working environment attract top-tier talent then position your shop to go after that type of work. Conversely if your culture is lacking (and you don’t plan on fixing it) and you typically attract less experienced talent, then sell into less complicated projects.

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