Step by step guide on how to increase your day rate

1.     Get to know your actual day rate

The number one place to start increasing your day rate is knowing what your actual day rate is.  Of course, we all know our rate cards, but what is your day rate  in reality?

Your net day rate is your revenue divided by total hours spent on billable contracts.

Depending on how well your jobs are run you will find that your net day rate is several percent lower than your rate card rate.  E.g., your actual rate is £700 per day rather than £1000 per day.

2.     Is your day rate really the problem?

Consider a firm whose rate card day rate is £850, but the new day rate is £400 per day. The gap between what the firm wants to charge and what it is earning is significant. This is normally a sign that there is an underlying business operations issue, which leads to a low GP, rather than a day rate issue.

In such scenarios, it is often not worth increasing the day rate, as due to inefficiency it will not translate into an increase in GP.

(If this is your case, it is worth checking our article on how to double your utilisation and get your business processes sorted out first.)

3.     Calculating the desired impact

A key question is “what  result do you want to achieve from  a day rate increase? It might be that your cash is tight, and you need greater GP for working capital. Or, the people costs are increasing, and you need to maintain the GP.  All above lead to a key question, “in a perfect world, what increase in your gross profit would you like?”

Consider an example:

A company with a monthly turnover of £100,000, has a GP of £60,000. They figured out that they need a gross profit of £70,000 so they would like to increase their day rate.

They bill 200 days per month (c10 people), at an average day rate of £500 per day. To get to £70,000 GP they will need £10,000 per month extra, which is £50 per day. Therefore, their new net day rate is going to be £550 per day. This means the revenue will become £110,000 per month and GP will be the desired £70,000.

The above firm has a rate card rate of £600 per day, so the new rate card rate (assuming all else remains equal) will need to be £650 per day.

It is important to look at day rate in the context of actual net day rate (i.e., the day rate your organisation tends to achieve) as well as the rate card rate which your customers will look at. Salespeople will often argue that increase in day rates is difficult to sell, but increasing day rate is typically easier, and less painful, than you think.

4.     Figuring which day rate is okay for the customers

Often, firm leaders consider that increasing day rate for the organisation is more dangerous than one might think. Professional services firms inherently undercharge themselves for a myriad of reasons. It is typically a good thing to increase your prices.

To figure out the size of the risk to the firm in increasing the day rate, consider the following:

•   When was the last day rate increased? It is reasonable to assume a 5% per year re-indexing. Using the example above, if the last day rate increase was three years ago, their day rate should be:

From the above example you can see that in three years, if you adjust for inflation the day rate, in fact, should be £695. In this scenario, this should give the firm some confidence about its rate increase. In fact, one would argue that the rate increase should be more aggressive, as it is out of step with the economy.

• How many customers will you lose? Let’s consider the example above again. The company is pitching at 8% increase in its prices.  The question is – will you lose 8% of customers. In most cases, the answer is a firm ‘no.’ In which case, there isn’t an issue. The worst that will happen, is you will increase prices, some customers will leave, but they were paying the old rate so you will have more capacity to take on new customers who are prepared to pay your new rates.

5.     Be honest with the customer

Most firms we see set their rates too low and do not re-index often enough. It is an uncomfortable conversation to have with a customer, but consciously or subconsciously the customers know it already. Today’s staff costs push professional services firms to the limit on their GP (particularly in UK and the US). Part of the reason that the customer is buying the service from you is that they could not afford the staff to do the service that you do, so they already know there is a cost saving for them (whether this is a small or a large contract that you are doing).

Have the honest conversation with the customer about the forces in your market and explain the value that you bring. Most customers are prepared to pay higher prices, which means more working capital for you.