RaiseRates_JF201814

Why Can’t I Raise My Rates? An Introduction to the Economics of Language Services

Freelancers often feel constrained when setting their rates. Why can’t they charge more? Value, scarcity, competitive markets, and limits on differentiation offer some insight into this issue.

Note: In compliance with U.S. antitrust law, no specific rate recommendations are made in this article. This text is based on an ATA webinar presented in May 2017.

For millennia, humans have struggled with the concept of value. Why are some things more valuable than others? Who decides? Why, Plato pondered, are rare things so valuable, when others, like water, are not?

Scottish philosopher Adam Smith, in his seminal work, Wealth of Nations, formalized this thought exercise, which has come to be known as the diamond-water paradox. No one needs a diamond to live, he wrote, yet its scarcity seems to lend it value. On the other hand, everyone needs water to survive, but its relative abundance makes it cheap.

As such, Smith concluded, there must be more than one type of value. He differentiated between value in use and value in exchange. Water is very useful, but it won’t buy you much, whereas diamonds are relatively useless, but in exchange, they buy quite a bit. Thus, value in exchange must depend on both scarcity and a concept that has come to be known as marginal utility, which shall be discussed in more detail later.

Before delving any further into modern economic theory, though, it’s important to mention what this has to do with the language services industry. The astute freelancer may realize that these concepts can be readily applied to our reality. How are our services valued? What is their marginal utility? Are we offering something that has value in use, value in exchange, or perhaps both? This article explores these concepts to provide a framework aimed at helping language services professionals understand the market better, where they stand in it, and what they can do to improve their current position.

To answer the titular question regarding rates, we first need to establish a few premises. For starters, our analysis will be limited to the translation market, although this same analysis could easily be applied to the interpreting market. More specifically, we shall examine the situation of professional freelance translators currently working in this market, who understandably would like to earn more, but don’t have a lot of options to improve their income. In general, they can: 1) work more hours, 2) increase their output of words per hour, or 3) increase the money they earn per word. For now, let’s assume that said freelancers are already working as many hours as possible and producing as many words per hour as they can. That leaves one option: raising their rates.

Is that even possible? If so, how? And what are the constraints? To answer these questions, we need to define a few economic concepts, starting with value.

Value: Value, in our case, comes from offering a service that someone wants and is both willing and able to pay for. There are many language pairs out there that aren’t commercially “valuable” because there isn’t enough demand or enough consumers willing and able to pay for them. For instance, Navajo>Hungarian is a language pair unlikely to offer a feasible career path. English>Spanish, on the other hand, is a different story.

Scarcity: Scarcity of translators refers to the number of qualified professionals who can provide the service offered in a valuable language combination. And scarcity on the market will tend to vary with the barriers to entry for new translators. These “barriers” may include the skills needed to be a professional translator or the experience required to translate in a specific field. The upshot is that the more scarcity there is in a “valuable market,” the greater the relative value of those scarce professionals.

Marginal Utility: Likewise, we need to have a basic understanding of marginal utility, which in our case refers to the relative usefulness of a service being offered. For instance, if there aren’t any qualified translators available in a language pair, then the first translator to offer these services is going to have very high marginal utility. In other words, she will be “valuable.” But as more and more translators begin offering that same language pair, the less valuable each of their individual services will be to the market as it becomes saturated. This leads to a more general concept in economics called the law of diminishing marginal utility. In short, the more of a given service there is on offer, the less valuable one more “unit” of that service is going to be.

Supply and Demand: Our market, like any other, consists of supply and demand. Normally, we think of ourselves as consumers, on the demand side, while businesses provide the supply. But to understand the language services market, we need to flip this model so that we, as language professionals, are the supply. We supply words, and our supply is limited by both our productivity and time.

On the other side, demand comes from those who need translation services, such as agencies, businesses, the government, hospitals, or even individuals. The important thing on the demand side is to bear in mind that anyone who wants our services is also going to face a budget constraint, which means they have a certain amount of money they are “willing and able” to spend on our services.

Consumer Perception: Consumer perception is another factor affecting market rates, which, for language services, means how businesses, agencies, or the government view them. When consumers perceive value, they are more willing to pay for it, which raises a series of questions for our market. Do buyers of language services understand the services being offered? What value do they place on them? What are their budget constraints? And can any other competing services (for instance, machine translation) be used instead? All these variables will have an impact on final market rates.

The Interplay of Supply and Demand

Both supply and demand are subject to economic “laws.” When discussing these laws, economists employ a Latin term, ceteris paribus, generally translated as “all else being equal.” In other words, to simplify our analysis, we start by examining just supply or demand, without any other variables coming into play.

The law of supply is fairly simple. As the market price increases for a service, suppliers, or in our case, translators, will offer more of their services because they can make more money doing so. Hence, there is a direct relationship. Price goes up, supply goes up—ceteris paribus.

The law of demand is the opposite. As the market price increases, consumers will demand fewer services because more expensive services eat up more of their budget. This is an indirect relationship, which depends upon both marginal utility and budget constraints. Price goes up, demand goes down—ceteris paribus.

The interaction of supply and demand results in a market. Conflicting forces push one another toward equilibrium. The rub is that they won’t ever achieve it. Prices are always changing. Equilibrium is a moving target. But it’s these forces of supply and demand that help determine prices, or, in our case, the rates available for language pairs.

Why are supply and demand always shifting? Scarcity tends to be the key. In general, when supply exceeds demand, prices fall. And when demand exceeds supply, prices rise. Why? To answer that question, we need to examine the market supply of translations in more detail.

There are lots of variables that determine supply. First, as already stated, is the existing price on the market, which is sometimes referred to as the going rate. As the going rate rises or falls, supply will change accordingly. The next variable is the labor required to offer it. In our case, this means the number of translators on the market and how much, on average, they get paid for their services. We also have to take into account available technology, taxes, and subsidies, plus the prices of related services, such as machine translation. Clearly, this analysis is not simple. But isolating these factors is the first step to being able to explain the market’s machinations.

On the demand side, we also start with the going rate. Then we look at variables such as consumer budgets, the price of complements and substitutes, consumer tastes and preferences, the total number of consumers out there for a given language pair, and expectations about current and future pricing, as well as advertising and marketing. As each of these factors change, the demand itself for translation services will change in response.

Competitive Markets

Of course, not all markets are the same. They range from what economists call a monopoly—where one provider or translator completely dominates the market—to pure competition, where there are so many translators and buyers of their services that no individual has any market power over any other. As you are probably aware, most markets fall somewhere in between these two extremes.

The language services market, for most language pairs, is one in which there are lots of translators on the supply side and lots of consumers on the demand side. Hence, our market is relatively competitive. What is the implication?

People sometimes (erroneously) talk about language services as being commodities. That is, a situation where everyone is offering the same thing. But for an economist, commodities have a specific definition: a commodity is a standard, interchangeable product. It’s a good, like corn or gold, where there is no differentiation. Commodities are absolutely identical. Thus, from an economic standpoint, it’s pretty clear that language services are not commodities. Why? Because they can be differentiated. And differentiation, it turns out, is a freelancer’s best friend.

Differentiation

Differentiation is one of the key aspects of a competitive market with seemingly similar products or services, which must meet minimum requirements. But translations, as we all know, are all different. And when these differences add value for the consumer, they provide an avenue for language professionals to affect their price.

As language professionals, we need to ask ourselves what makes our services different. I have proposed a pyramid of differentiation to help us understand this concept better. (See Figure 1 at right.) At the bottom of the pyramid are the basic requirements to work in our field: knowledge of two or more languages. Everybody needs this skill to work as a translator. Moving up higher, in terms of differentiation, one may have a degree in a language or a specialization in certain fields, such as legal, medical, technical, or finance. Differentiating even further, we move up a step higher to adding specific skills, like desktop publishing or expertise in computer-assisted translation tools, or experience in another country or another field. And finally, at the top, is a question mark, regarding what ultimately differentiates one qualified language professional from one another. Only that individual can make that determination.

RatesFig1_JF2018

Figure 1: Language Professional Differentiation Pyramid

So, What Can One Do?

Having introduced the economics concepts above, we can now take a stab at answering our initial question: Why can’t I raise my rates?

The answer comes in multiple parts. First, language services are offered on relatively competitive markets, where individuals have limited economic power. Our services are difficult to differentiate. Consumers may not be capable of valuing a good translation over a bad one. Scarcity of qualified translators varies considerably among language pairs. The cost of “alternative services,” like machine translation, is low and attractive, even if quality isn’t commensurate. And technology, in general, is constantly changing expectations and cost structures.

While this analysis may sound disheartening, it should not be misconstrued as hopeless. We do have a range of possible prices in every commercial language pair, which tends to vary with quality, experience, skills, reliability, etc.

So, what, specifically, can an individual freelancer do? The short answer is: differentiate, differentiate, differentiate.

By definition, differentiation is going to be different for everyone. The important thing for individual freelancers is to determine how their services add value to their customers. By differentiating from the competition, they create the opportunity to charge more.

A few of the ways differentiation can succeed is through improved quality, expertise, consistency, productivity, business development, and unity. Unity, in this case, refers to individuals joining forces through professional associations, such as ATA. Since each of us, on our own, has relatively limited power to help the industry understand quality and differentiate one translation from another, a professional association is one way in which, together, we can educate the public and ensure that our consumers value us more like diamonds and less like water.


John M. Milan is the treasurer of ATA. An ATA-certified translator (Portuguese>English), economist, writer, and lecturer, he has over 20 years of experience in language services. He has an MS in microeconomics from Ohio State University, where he was a Foreign Language and Area Studies fellow, concomitantly specializing in Portuguese translation during his graduate studies. He also has degrees in international political economy and Spanish from Indiana University and studied abroad in Madrid, Spain, as an undergraduate. He has been involved in the Carolina Association of Translators and Interpreters, an ATA chapter, for over 10 years, serving on its board of directors for eight years and as president from 2013–2016. From 1996 to 2005, he was based in São Paulo, Brazil, lecturing as an adjunct professor of economics at a local university, while also working as a freelance translator and consultant. Contact: john@milanlanguageservices.com.

2 Responses to "Why Can’t I Raise My Rates? An Introduction to the Economics of Language Services"

  1. Risto Siikarla, CT says:

    I searched the article, expecting to find the word “efficient” or “efficiency”, but to my surprise they were absent.

    It stated: “let’s assume that said freelancers are already working as many hours as possible and producing as many words per hour as they can.” Why would we want to assume that? A translator can always sharpen his or her skills, acquire better tools and organize in other ways, and as a result, make more money without raising the rates.

    I learned this principle many years ago. I hired a Cuban Mariel refugee and his son to remodel my house in Miami. I watched in total amazement how skillfully and efficiently they worked, without wasting any time. They produced the same if not better quality than their competitors. They were cheaper but more efficient than the competition. For that reason they made more money and had more jobs. As far as I know they never had shortage of remodeling projects since the day they stepped off the boat.

    Raising rates will negatively affect the volume of translation request.
    That is my answer to the question.

  2. Simon Berrill says:

    I like the final message of your article. Sadly, that’s confined to the last three paragraphs. The problem is, that the question is wrongly framed. Instead of the negative “Why can’t I raise my rates?”, it really should be “How can I raise my rates?”. Because, if we go about it the right way and if we’re good enough, we can.

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