Service Development

How to Price a Service

Pricing your service is challenging because you want to strike a balance between what your time is worth and what the service is worth, while staying competitive and driving business. This is especially true for those who are new to their business. Many service entrepreneurs undervalue themselves at first and charge too little to win customers. This is particularly common among entrepreneurs who charge per hour.

How do you actually price your services?

Everyone’s business is different, so the steps you’ll need to take will vary for everyone. Use the steps below as a guideline to help you get started with a baseline and remember that you can always change your prices as your business grows.

  1. List and identify the cost to start your business and then estimate your total startup costs
    • Include costs to design a fully functional website with a way to book your services and pay for services

    • Include the costs of any tools you’ll have to buy

    • Include the costs of any certifications you’ll need

  2. Research the competition and learn how much they are charging
    • Understand what your competitors charge and whether it makes sense to charge more or less for a similar service.

  3. Calculate your baseline hourly rate
    • Add up costs: Include your SALARY, startup costs, costs that go directly into your service and expenses necessary to operate. Let’s say you want to make $75,000 and your total costs are $25,000

      • Total costs are: $100,000

    • Estimate how many hours you plan to work per year

      • 40 hours/week * 50 week/year = 2000 hours/year

    • Estimate billable hours or hours that generate revenue, these are around 80% of total hours worked per year

      • 2000 hours/year * 0.8 = 1600 hours/year

    • Calculate your hourly rate, divide your total costs by billable hours

      • $100,000/1600 hours = $62.50/hour

    • Add a profit margin to help grow your business or to pay unexpected costs. A 10% to 30% margin is healthy for most service pricing models - we’ll use 15% for our example

      • $62.50/hour * 1.15% = $71.88/hour

    • Sanity check, compare your estimated hourly rate to your competitors. This is the price your customers expect to pay.

      • Charging more: Are you using premium materials? Are your customers getting added value? Do you have a lot more experience and expertise? Make sure your customers know why they should pay more.

      • Charging less: Are you simply trying to build a customer base? Make sure your customers know the prices are lower for a limited time. Feel free to modify or increase your prices a little to be on the safer side.

      • Charging just right: This is okay too, but remember that it is usually easier to lower prices than to increase them after your business opens.

  4. Select a pricing strategy, the most common ones are cost, competition and customer-value based pricing.
    • Cost based pricing: Include costs like from materials, overheard, and the value of your time. Pricing decisions are based on data, in order to get a certain return on investment or a certain markup on costs. The main weakness of cost-based pricing is the willingness of consumers to pay and that competitive price levels. The main advantage of this approach is that the data you need to set prices are usually easy to find.

    • Competitor based pricing - Understand what your competitors charge and whether it makes sense to charge more or less for a similar offering. Pricing is based on competitive price levels or on anticipated or observed actions from competitors. The main advantage of this approach is that the competitive situation is taken into account, and the main disadvantage is that it disregards the customer’s willingness to pay.

    • Customer-value based pricing: This approach takes into account actual and potential customers - no matter how much you charge, you won’t make money if customers are not willing to pay. You need to understand how customers perceive your business. The advantage of this approach is that it takes a customer-centric approach. The main disadvantage is that data on customer preferences, willingness to pay, and size of different market segments are usually hard to find and interpret.

  5. Select a pricing model, the most common ones are cost, competition and customer-value based pricing.
    • Time based pricing: Charge for the exact time used to complete a service or in 15/30/60 minute blocks. Hourly rates are often used when you are pricing your expertise and seniority. A more experienced photographer with an extensive portfolio will generally be paid a higher hourly rate than a less experienced photographer. You should consider including your travel time as an extra charge.

    • Flat rate pricing: Use your hourly rate to estimate how long it will take to perform the service. Charge a fixed price for each service listed on your menu/portfolio. If a project takes longer than expected to complete, you may risk losing money on the client. Consider including a cap on the number of hours involved so you can charge additional fees if the service runs over that time.

    • Tier based pricing: Allow customers to pay less for less or more for more. This is typical for service bundles like 2 sessions for $160 or 4 sessions for $280. Don’t be afraid to change your pricing as you go either—it will take time to get it right, and eventually, you’ll want to raise your prices as you get more experience and clients.

    • Variable pricing. Allow customers to bargain and negotiate to set the price for each customer. In general, charging different prices to different customers should be based on some sort of repetitive reasoning. Like businesses vs individuals, 100 hours vs 50 vs 25 vs 2. One thing a business can not afford to lose is its integrity and respect among customers.

  6. Price your services
  7. Estimate your cash flow to make sure your business will be profitable.
    • A cash flow refers to the net amount of cash and assets being transferred into and out of a business. A cash flow statement can be used to estimate your expected net profit or how much money you will actually make.

    • Don’t forget to include these typical overhead expenses: taxes, insurance

Why is pricing your service important?

Your price will ultimately determine your net profits, or how much much your business actually makes. At the end of the day, profitable businesses thrive and all others fail.

Pro Tip

Make sure you charge enough for your service. One of the biggest obstacles that owners face when starting their first service based business is not charging enough. Make sure to charge your customers what’s fair compensation. Arm yourself with research, competitive prices and a strong baseline price. Remember, it is easier to lower prices from a baseline, than to raise them while keeping your customer’s willingness to pay.