From the course: Pricing Strategy: Value-Based Pricing

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Improve your profitability with pricing

Improve your profitability with pricing

From the course: Pricing Strategy: Value-Based Pricing

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Improve your profitability with pricing

- Let's start with requests. What if a graphic designer increases the hourly rate by 10% and as a result she loses 10% of her work? Do you think her profitability is increasing or decreasing? Let's have a look. Her income statement may look like this. She bills 1,200 hours per year for her own work and 3,000 hours for all freelancers that she employs over the year. Her costs are $90,000, which leaves her a gross profit of $120,000. Now, she increases the price by 10% and gets 10% less work. Her revenue declines by 1% but her profit increases by $11,400, which is 9.5%. How is that even possible? The reason for this leverage is called variable costs. Her revenue declines by $3,600 but the money she pays to the freelancers decreases by $15,000. Hence her profit increases by $11,400. And we can assume she has a better life since she works 10% less. Who doesn't want that? While we are at it, we can challenge the assumption that she will actually lose 10% of her clients. Short-term, this…

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