Rates as a function of capacity

I recently had the pleasure of attending the June meeting of Dublin chapter of the Bootstrappers Breakfast. After the meeting there was a Q & A session with the remaining attendees. I remarked to Sean Murphy that I’ve recently moved to a new pricing model for consulting. I’ve started to adjust my pricing based on my current capacity. That is, as my schedule becomes fuller and I become busier, my hourly rates increase. That way clients can decide for themselves how important their project is. If it can wait, we push the project back a bit, my price goes down and the clients get a price break. If there is an immediate need, they will need to pay a premium and it will be a rush job.

I do this because the last few hours of my week act as a buffer for anything unexpected that should come up. If I pack my schedule to the brim, I run the risk of all sorts of chaos if/when anything unexpected comes up.

In lean terms, I’m increasing costs as my capacity decreases.

Why? A few reasons:

First, it provides an incentive to prevent me from becoming overtaxed and taking on too much work. This regulates the flow of work into my 1530 schedule and provides a sort of cadence for new work. This allows me to plan more efficiently.

Secondly, by stabilizing the work in and out, I stabilize my flow. This helps me churn out better work quicker. If you take on everything that comes your way for the same price, there’s no doubt that that you would begin to resent those last few pieces of work that you’re cranking away on any given Sunday night. With the rate increase, at least there is ability to look back and see that there is increased compensation for working later at night and into the weekend.

I should note that this obviously this can alienate clients and cause you to lose work. However, part of managing a successful service based business is to know when and how to control clients. If you simply say ‘Yes’ all of the time to everyone, you’ll quickly find yourself taking on much more work than you’re capable of. That will lead to you not being able to deliver consistently excellent work and you’ll lose clients anyway. I would rather have a healthy relationship with a client and be able to say ‘No’ as often as I say ‘Yes’. Those are the kinds of clients you’ll be able to build a sustainable business from.

BTW, this isn’t a new concept. The concept of cadence and queue management is applied in a lot of different places. For example, Chicago is entertaining the idea of rolling out congestion based pricing for its tollways that’s similar to several other tollways across the US. Comed and other electric companies employ Real-Time Pricing. These are just two other examples and there are many more.

Take a look at your own life and see if you can figure out ways to employ a form of cadence to help stabilize things.