Rate increases: how many hours can you lose?

Short answer Test a rate increase against two break-even points, not only the new rate. In the illustrative client below, a 15% rise from 80 to 92 an hour keeps revenue level even if the client cuts its hours by 13.0%. Contribution after variable costs holds until hours fall by 19.4%. Past the first point, revenue is below today's; past the second, profit from this client is below today's.

Start with the hours the client will buy

The usual question is what the new rate should be. For an existing client, a better first question is how many hours that client will buy at the new rate. The answer changes both revenue and profit. A higher rate can be paired with fewer hours, and the outcome can be less money than before, even though every hour is priced higher.

The two tests below answer that question with one client's numbers. They do not need a market survey or a prediction about how the client will react. They show how far the hours can fall before the increase stops helping, which is the decision you actually face.

Set up one client

Assumptions. The client buys 500 hours a year at 80 an hour, which is 40,000 of revenue. Variable costs are 30 an hour, or 15,000 a year at 500 hours, covering things such as software seats, subcontracted work and payment fees. Fixed overheads are left out because they do not change with this client's hours or your rate. The figures are illustrative; replace them with your own.

A 15% rise takes the rate to 92. If the hours stay at 500, the difference is simple: revenue rises by 6,000 and contribution rises by the same 6,000, because the variable cost of the work does not change.

That is the easy case. The question is what happens when the client trims its hours in response to the new rate.

Find the revenue break-even

Revenue stays at today's 40,000 as long as the client buys 40,000 ÷ 92 = 434.8 hours. That is 65.2 fewer hours, or 13.0% of 500. The same figure follows from the rise alone: 1 − 1 ÷ 1.15 = 0.130. A 15% increase therefore absorbs a volume loss of up to 13.0% before revenue falls below today's level.

This is the reverse of the question in the discount walkthrough, where a price cut removes a much larger share of profit than the discount itself. A rate increase asks the opposite question: how much volume can you lose before the extra price stops paying?

Find the profit break-even

Revenue is the wrong test once variable costs exist, because each hour now keeps 62 after its variable cost, where it used to keep 50. The question is when the client's contribution at the new rate falls back to today's 25,000. That happens at 25,000 ÷ 62 = 403.2 hours. The client can cut 96.8 hours, or 19.4%, before this account is worth less to you than it is today.

Fixed costs are not part of this test. They do not change with the client's hours or with your rate, so they do not change the comparison between today and after the rise. If the client's hours were to fall far enough that you needed to reduce fixed costs, that is a separate decision for the whole business.

Test a cut in hours

Keep the new rate of 92 and vary the hours. The table shows what each level does to revenue and contribution against today's figures. The two break-even rows use exact hours, shown here to one decimal.

Read the table as a map for a conversation with this client. Down to 434.8 hours, the client can reduce its work and you still earn as much revenue as before. Between 434.8 and 403.2 hours, revenue from the account falls below today's figure, but its contribution stays above it. Below 403.2 hours, the account earns less than it did. At 400 hours, which is a 20% cut, revenue is 8.0% lower than today but contribution is only 0.8% lower, because each remaining hour now earns more.

A phase-in has a price

A common compromise is to keep the old rate for a while. That is a business decision, and it has a figure attached. At 500 hours a year, the gap between 80 and 92 is 12 an hour, or 6,000 a year on this client. If the hours are spread evenly, a six-month phase-in gives up about 3,000 of revenue. Whether that is worth paying depends on how much you value keeping the client on the current terms, not on the rate itself.

Make the phase-in visible rather than vague. Write the new rate, the start date and the date from which the full rate applies, so the cost of the transition is a known number you chose to pay.

Fixed-price work needs its own answer

A new hourly rate does not automatically reprice a fixed-price project that is already under way. Whether it applies to the remaining work depends on your contract and what you agreed with the client. Check the terms, then change the price of any extra scope through a change request. The change request walkthrough shows how to do that without reopening the whole quote.

For future quotes, check the rate itself before you announce it. The freelance hourly rate calculator derives a rate from annual compensation, overhead, billable utilization and target margin, so the new number comes from a budget you can explain. The billable hours walkthrough shows how utilization changes that rate.

Keep the cost model separate from the rate

The variable cost in this example is what it costs you to deliver an hour. It is not the rate you bill, and it should not include the margin you want to earn. Mixing the two is a common way to count the same profit twice. Cost rate versus billing rate explains the distinction in more detail. Keeping the variable cost separate also lets you rerun the profit test if your software or subcontract costs change later.

Say the new rate plainly

Tell the client the new rate, the date it starts and whether it applies to work already quoted. State what does not change, such as the scope, the working pattern and the notice you agreed. Check your contract for any notice terms before you send the message; this post does not cover legal requirements, and those vary by jurisdiction.

Avoid bundling a discount into the same message unless you have run the numbers. A discount is a second cut to the same account. At 92 an hour, a 10% discount brings the rate to 82.80, which leaves 52.80 of contribution per hour instead of 62. The discount impact calculator shows how quickly a discount reduces profit on your own figures.

The rush side of the same discipline, pricing a compressed delivery by its real cost rather than a flat percentage, is covered in the rush fee walkthrough.

Key takeaways

• Test a rate rise against the hours the client will buy, not only against the new rate.
• For a 15% rise, revenue holds up to a 13.0% cut in hours. Contribution after variable costs holds up to 19.4%.
• Variable costs make the account more resilient than revenue alone suggests. Use both tests.
• A phase-in is a concession with a price. At 500 hours, the gap from 80 to 92 is 6,000 a year.
• Price future rate changes and any fixed-price work separately, and keep the variable cost out of the rate.

Frequently asked questions

How big a rate increase is too big?

This post cannot name a percentage that suits every freelancer. Use the break-evens for the client in front of you. If you think the client may cut hours by more than the revenue break-even, the increase carries more risk. The more useful question is whether the new rate still reflects your costs and the value you deliver.

Should I raise rates for existing clients or only for new ones?

Both can make sense. New clients see the current rate from the start. Existing clients depend on your contract, the notice you have given before and how the work is structured. Keeping the old rate indefinitely has a visible cost: in the example, 6,000 a year on one client, multiplied by every client who stays on it.

What if the client cuts hours after the increase?

Look at contribution as well as revenue. In the example, the client can cut 19.4% of its hours before contribution falls below today's level. If its hours drop to 400, which is a 20% cut, revenue is 8.0% lower than today and contribution is only 0.8% lower.

Does a rate increase change my cost model?

It should not. Your cost model holds what it costs you to deliver an hour, such as software and subcontracted work. The rate you bill is a separate figure. Mixing them is how the same margin gets counted twice.

Should I offer a discount to soften the increase?

Only as a deliberate decision with its own numbers. A 10% discount on 92 an hour leaves 82.80 an hour, and contribution per hour falls from 62 to 52.80, a 14.8% reduction. That removes 9.20 of the 12-an-hour gain the rise created, about 77% of it.

Prepared with AI assistance. These are illustrative calculations checked against the calculator code, not client case studies or market benchmarks.