Why failing to index your hourly rates will bleed your bottom line
Do you throw away revenue and profit to inflation because you don't index your hourly rates? Here are 2 reasons why you need to keep raising your rates.
Do you throw away revenue and profit to inflation because you don't index your hourly rates? Here are 2 reasons why you need to keep raising your rates.
We all know the feeling that everything was cheaper in the good old days. Cheaper petrol, cheaper housing, and sweets cost next to nothing.
However, prices slowly increase under the impact of inflation, new legislation and taxes, new technology and general market development.
Year after year, you watch the prices creep up, and next year everything will be even more expensive.
If you run a consultancy firm, you probably invoice your clients exactly the same hourly rate on 1 February as you did on 1 December. A large number of companies never increase their prices in accordance with the index at the start of a new year.
This has a negative impact on both your turnover and your relationship with your clients.
The revenue loss of not indexing
It stands to reason that you lose turnover and impair your bottom line if you fail to adjust your hourly rates in accordance with changes in the consumer price index.
If you pay more in rent, for hot water and coffee while continuing to cash in the same amount for your work, your company will loose money by default.
Example: What will it cost you if you fail to increase your 2022 prices in accordance with the index?
Say you employ 20 consultants who each invoice 1,600 hours a year at a rate of EUR 160 per hour. We assume that you could have increased prices by 0.6% corresponding to the average European inflation in 2020 – but you don’t.
- As a result, you invoice EUR 23.040 less than what you should have invoiced – which is the same as forgetting to invoice 144 hours.
This money would have landed directly on your bottom line, as it is not associated with additional costs.
Massive price leaps will strain your customer relationships
A potentially more serious consequence is that you often have to renegotiate prices with your clients unless you index your hourly rates every year.
Most clients are unlikely to rebel if you increase your hourly rates by 0.8% in January, corresponding to inflation.
However, if you fail to adjust your prices on an annual basis, your clients will question your price increase when you finally adjust your prices to make up for several years of inflation and market development and they suddenly see a big jump on their invoice.
In a worst case scenario, your client will see a big jump in prices as a reason to reconsider whether they want to continue working with your company at all.
Three reasons why many companies do not index their hourly rates
Paradoxically, one of the main reasons why many companies fail to index their hourly rates is precisely their relationship with their clients.
In a market with fierce competition, many prefer to give their clients a kind of ‘discount’ by not indexing their prices out of fear of driving their clients into the arms of competitors. In the end, however, this misguided reasoning eventually leads to the above-mentioned drastic jumps in prices. In some cases, companies which fail to increase their prices continue trading under contracts that leave them underpaid for their services.
DOWNLOAD THE GUIDE: How to increase the number of hours you can invoice
Another common reason for failing to index hourly rates is that sales organisations focus on selling new projects rather than optimising the existing client base and current contracts.
Finally, there are many who have no general overview of their hourly rates for existing employees, clients and projects and the terms and conditions of existing contracts. They also have no effective system to implement adjustments in practice.
So how do you begin indexing your rates and stop your turnover from bleeding?
Include indexation in your contracts
The first step towards regular indexation of your hourly rates is to incorporate the indexation in all new contracts and in existing contracts when these are renewed.
If you state in your contract that your prices increase automatically at year end in accordance with the net consumer price index, you avoid having to discuss the issue with the client later.
Unexpected price increases are never welcome, so it is better to deal with the issue up front.
How do I determine the rate of indexation?
There are always several factors to consider when determining the percentage increase.
There is no fixed formula for how to do it.
As a general rule, the annual inflation rate and net consumer price index are a good place to start. As a minimum, you do not want to lose money by failing to keep up with the index.
In addition, it depends on when you last adjusted your prices and whether your relationship with your client will survive a drastic price increase. If you are looking at a big jump in prices that will challenge your existing contracts, it is best to adopt a strategy that spreads the increase over two to three years.
In this case, it is important to take the forecast for future inflation into account. As an example, Trading Economics, expects inflation to increase by 2.0% in 2022.
Finally, your marketing strategy determines how you position yourself in relation to the prices of your competitors and whether you expect your competitive edge to improve in the coming year.
Try using a tool that makes indexation transparent and effective
If you want to start optimising what you earn on your existing clients and projects, TimeLog gives you a unique tool to keep your hourly rates up to date – for all clients, employees, services and projects.
Indexation is built into TimeLog’s project management. As a result, you can quickly and effectively index all your hourly rates across the entire organisation.
This applies whether you are a small start-up or a large group with many different price lists and individual contracts.
You can try TimeLog free of charge for 30 days or book an appointment to hear more about indexation using TimeLog
