The other day I was talking to a client. One of her contractors had just announced her annual rate increase— 50% over her previous rate. It’s a lot of money, and my client wasn’t quite sure how to feel about it. On one hand— good for the contractor! We should always celebrate when a fellow business owner makes a positive move for their business. On the other hand, ouch. That’s a lot of money.
It’s kind of funny— I just did the very same thing with our copywriting business. It’s a sound business move, the quality is there, the market will bear it. But my clients are corporations with dozens of employees, so that feels different. They probably spend more on copy paper than they do on content.
But when it’s just you, it’s scary to have a fixed cost suddenly balloon.
Even if you know she’s worth it.
Even if you know you’d do the same.
And even when you know it’s not personal, it still feels obscurely like a threat. A threat to the profitability and success of your business.
Of course, most people squash that thought firmly. People deserve a living wage, and feeling conflicted about paying that wage doesn’t square up with our sense of ourselves. We’re progressive. We’re fair.
So… we should just pay it, right?
But it’s not so easy to say, “They’re worth it,” and cough up that extra dough.
I mean, that’s not to say they aren’t worth it, either. But contractors, like all services we use to run our business, have to make sense from a value-added perspective.
So when a contractor raises their rates, here’s how to figure out what to do.
Ready? It’s a very simple three step process.
- What is it worth to me to get this stuff handled?
- What benefits accrued by having it handled?
- What does this person bring to the table that a replacement might not and can I make adequate use of that talent?
But first, let’s refresh ourselves on how pricing works.
Why Pricing Is Subjective
We think of costs as being somehow fixed, but when it comes to services, you have to remember that the cost isn’t tied to some intrinsic worth, but rather it’s tied to what some individual feels it’s ‘worth’ to them not to have to deal with it.
You were probably told this when you first started thinking about opening a business, and in that context, you were probably told “I know you would never pay someone to do this. Because you already know how to do this! Lots of people don’t, and they will!”
As a solopreneur, you likely outsource for one of two reasons:
- Either you can’t do something at all, or,
- You could do it, but it’s not the best use of your time.
If you could hypothetically do it, you’re probably especially sensitive to price increases, because in your mind, it’s not that hard. On the other hand, if your audio engineer raises her prices, you’re more likely to feel it’s reasonable. You’re measuring it against both the time and expense it would take for you to learn to do it yourself.
So that’s the first level of consideration for pricing— subjective worth.
Why Outsourcing Pays Dividends
The second level of pricing we want to look at is opportunity cost.
This means, how much more COULD you make if you didn’t have to deal with [outsourceable work]?
Again, you probably heard this when YOU were thinking about pricing things. “They’re making $200 an hour, so even if you charged them $150/hr, they’re still making more money to have you do it.”
Likewise, if you can do 3 more hours of billable work because your VA takes those three hours of non-billable work off your hands, then as long as he’s charging you less than you bill, you’re coming out ahead (and probably doing more of the work you enjoy.)
[Tweet “Contractors, as all services we use in our business, must make sense from a value-added perspective”]
Now, this doesn’t take into account the fact that you might (gasp) just do less work when you outsource to others. But you can still balance that against the bottom line, because too much work leads to burnout, which has its own associated costs. It’s just a little harder to get concrete numbers.
So even though the raw numbers of the invoices you’re paying might be painful to gaze upon, you still have the ability to run the numbers and see if it actually is hampering your profitability.
What’s Your Hiring Philosophy?
The third level of price reasoning is perhaps the most individual.
We look at the concept of ‘worth’ as a function of the open market and of our hiring philosophy.
Hiring philosophy is something none of us thinks about until we go into the hiring process and we realize that we have values driving our reasoning that we never articulated before. This makes more sense with examples.
So for instance, if I have someone updating spreadsheets for me, I reason that this is a very easy job. It can be done with little training or skill and requires no subjectivity. It doesn’t even require good English, although for personal communication reasons I prefer it. So strictly speaking, I could hire this job out to a person in India for $3/hr. But I don’t. Why not?
Another for instance. If I hire a VA to set up social media for me at $10/hr, if it takes her more than 5 hrs a month, am I better off just subscribing to Edgar? Under what circumstances would a human worker be more worthwhile in this situation? And why shouldn’t I just subscribe to Edgar from the get-go?
Finally, how much is it worth it to me not to have to find and train a replacement as the cost of this particular service provider rises? Remember, for most roles, a person’s value to your business increases as they get to know you and your business. But, at the same time, are you making use of that information? Or are you having them fill in spreadsheets?
You might think that there’s Right Answer to each of these scenarios. But there isn’t. It hinges on the way people think about the process of hiring, the reasons for hiring, and how they relate to their contractors.
Questions To Ask Yourself
Now that we’ve looked at subjective worth, opportunity costs, and hiring philosophy, here are some questions to ask yourself.
How much will the price increase affect your bottom line? Is is a few hundred a month, or a few thousand?
You don’t want to start shouting “The sky is falling!” if it’s only a matter of a few hundred dollars and/or the amount won’t meaningfully impact your quality of life or profitability. It might be slightly painful, and you might decide that the increase isn’t merited for the type of work you want done, so you let that contractor go and find another one. Either way, this is something you can roll with.
What, exactly, is the contractor doing for you?
Write out a list of specific tasks. Which ones are the high value, subjective ones? Which ones could you pass to someone a little less experienced? If you like this contractor, and at least SOME of her tasks are worth paying more for, simply decide what isn’t worth it and find someone else to do them.
What ‘soft skills’ is this person bringing to the table?
For instance, Thea has a lot of initiative, and I value that. That is a skill that’s more difficult to replace than the actual functional things she does for me. In general, tasks that are highly subjective (or, more concretely, require a lot of experience to perform well) are ones where people you trust can command quite a high premium, as long as it doesn’t affect the profitability of the business. Presumably, you are working to provide just this sort of highly-prized relationship in your own clients. Should it surprise you that your contractors are trying to do it with you?
Am I using my contractor to her full potential?
This is a tricky one, but you know, a lot of the time contractors raise their rates because they’re ready for bigger projects and more responsibility. Maybe if you only have $10/hr tasks for her, you’re better off letting her go do the $50/hr tasks that she would find more challenging and gratifying. If that’s the case, wish her well, give her a good reference, and ask if she has any up-and-coming colleagues she’d like to recommend to take her place.
Finally, what’s my hiring philosophy?
Some people hire for deep emotional resonance in the work. These are people who are very sensitive to their team culture, and even the VA who handles the email needs to be on the same wavelength.
Some people are comfortable with spending money on the best person the can find for a given role— they prioritize high-achieving individuals with honed expertise.
Some people want contractors who don’t require much if any oversight. They want people who will do the job they’re assigned and not bother them with anything.
Some people love finding “a job for a person.” These are typically the uber-connectors, the ones who take a shine to someone and then work to find a place for them; sometimes working for them, sometimes with a friend.
Me, I like to find hidden, undervalued gems, and polish them up, positioning them for bigger and better things. The way I see it, I get a highly capable worker for a while, I help them find and hone the value in their work, I point them towards potential opportunities, and see them climb. Eventually, they’ll raise their prices beyond what I’m prepared to pay, but by that time, they’ll have plenty of opportunity elsewhere. Yes, I’ll have to find someone else, but I like that process too. I like to explain what I want them to do and why, and I like to see people bloom into their role.
Think about what your idea of a great contractor would be. How would you interact? How would you work together? How would you know when the time had come to part? And what price band do you see yourself in (keeping in mind that each price band comes with their own pros and cons)?
Hopefully, you now have the tools you need to handle it gracefully (and logically) when you get that price rise email from your favorite contractors.
Has this been something you’ve struggled with in the past? I’d love to hear stories!
P.S., If you think this is something a friend or colleague should read, I’d be delighted if you’d forward it to them!