Pricing rates can be difficult to get right. Charge too much and you may lose customers. Charge too little and you can end up working hard without making enough profit to build a sustainable business.

Your price also sends a message. It says something about your business, your position in the market and the value you believe you provide. That is why pricing is not just a calculation.

In this episode, we use a simple framework called ONC: Objectives, Numbers and Choice. It helps us think about what we want our pricing to achieve, the numbers behind the price and the pricing options available to us.

About this episode

How much should you charge for your products or services?

The short answer is: it depends.

There is no single price point that works for every business, every customer or every situation. Your pricing sits somewhere between a floor and a ceiling.

The floor is the bare minimum you should be considering. The ceiling is the maximum your customer is willing to pay based on what you provide to them.

Where your price sits between those two points depends on your objectives, your costs, the profit you want to make, your capacity, your customers and the proposition you put in front of them.

The principles can apply to products as well as services, but the practical focus in this episode is on service businesses.

The ONC approach to pricing rates

Pricing is a blend of numbers, psychology, communication and business objectives. Businesses change and refine their pricing over time, but the basic principles remain.

Our ONC framework gives us three places to start:

Objectives: What are we trying to achieve?
Numbers: What does it cost to run the business, how much profit do we want and how much capacity do we really have?
Choice: Which pricing approach fits the business, customer and proposition?

Objectives: what do you want your pricing to achieve?

Before reaching for a calculator, think about the purpose of your pricing.

What are you trying to achieve over the next 12 months, two years and beyond?

If you want to build a larger audience or make your services accessible to more people, the highest possible price may not support that objective.

If you run a social enterprise, wider reach may be important because you want to help and support more people.

If you are building a lifestyle business, you may deliberately limit your working hours and choose a price that supports the income and lifestyle you want rather than trying to conquer the world.

If you want to position yourself as a high-quality or premium service provider, your pricing needs to support that message too.

There is no one-size-fits-all answer. Start with where you want the business to go.

Numbers: know what your business needs to recover

You cannot make a sensible pricing decision without understanding your numbers.

Start by writing down the costs of running the business and delivering your service.

That may include website hosting, marketing, rent, freelancers, staff, utilities, storage, software and other business costs.

Do not forget yourself.

You need to factor in paying yourself from the business. If the business cannot support you as well as its other costs, it will be difficult to make it sustainable.

Look ahead as well. Think about what your cost base is likely to be over the next six to twelve months rather than relying only on what you spent last month.

Your customers ultimately need to provide enough income for the business to recover those costs.

Then we need another number: profit.

How much do you want the business to make above its costs?

That figure will vary depending on your business, your customers, your proposition and your own goals. The important thing is that profit is part of the calculation.

For a wider explanation of why this matters, see What Is Profit? Gross Profit and Net Profit Explained.

Your working week is not the same as your billable time

This is where service pricing can catch people out.

You may have 40 hours available for the business each week, but that does not mean you have 40 hours available to sell to customers.

Some of that time goes into keeping the business running. Marketing, administration, social media, business development, supporting customers and developing new services all take time.

If ten hours of a 40-hour week are needed for those activities, you may have around 30 hours left to deliver work to customers.

Then ask another question: how many weeks of the year do you actually want or expect to work?

Once we bring together costs, desired profit and realistic time capacity, we can start calculating a useful charge-out rate.

There are two useful reference points:

Cost floor = total business costs ÷ realistic billable hours

Target rate = (total business costs + desired profit) ÷ realistic billable hours

These figures do not mean you have to sell your services by the hour. If you charge by project, the time required to deliver that project still sits somewhere behind the quote.

Use your rate as a reference point, not a prison

Once you have a number, compare it with what is happening outside the business.

If the rate looks low compared with the market and your proposition gives customers strong value, you may decide there is room to increase your target profit.

If your rate looks too high compared with what customers are willing to pay, do not simply ignore the calculation. It may be telling you to look again at your costs, capacity or the way the service is delivered.

The calculation helps focus the mind. It gives you something to test rather than guessing.

Choice: which pricing approach should you use?

Once we understand our objectives and numbers, we can start choosing how we want to price.

The episode looks at several approaches. They are tools in the pricing toolkit rather than rules that every business must follow.

Cost-based pricing

Cost-based pricing starts with what it costs to provide the service and adds an amount on top, usually as a markup.

Its big advantage is simplicity. It is easy to understand and apply.

The weakness is that it is not necessarily market-led. If we simply accept our costs and add a markup, we may fail to challenge those costs or consider what customers actually value.

That can leave the business uncompetitive.

Our guide to How to Price Using Target Costing looks at a different way of connecting price, cost and profit.

Value and market-based pricing

Value-based pricing looks at the transformation or solution you provide.

What problem are you solving? What pain are you removing? What is that outcome worth to the customer?

This moves the conversation away from simply asking how long something takes and towards the value of the result.

Premium pricing

If your service is genuinely different and you can demonstrate that difference, premium pricing may be appropriate.

The important part is being able to communicate why the customer should pay more.

A premium price without a premium proposition is difficult to sustain.

Competitor pricing

Looking at what competitors charge can give us useful market information.

What it cannot tell us is whether their price makes sense for our business.

Their costs may be different. Their capacity may be different. Their customers, experience, positioning and profit expectations may also be different.

So use competitor prices as information, not as a substitute for knowing your own numbers.

Break-even pricing

There may be times when your objective is simply to recover costs.

For example, you may be trying to establish a market presence or build an audience.

That can be a deliberate short-term decision, but it is not a sustainable long-term pricing model if the business never creates a surplus.

Other tools in your pricing toolkit

Discounting

Discounting does not automatically mean bad pricing.

If you have spare capacity and want to introduce more customers to the business, reducing a price may support that objective.

But the numbers still matter. A discount needs to be considered against your costs and the profit you are giving up.

Bundle pricing

You may also combine several services into one package.

If you understand the relative costs and profitability of each service, bundling can create additional value for the customer while still making financial sense for the business.

Anchor pricing

Anchor pricing brings psychology into the picture.

The customer sees one price first, which creates a reference point for the price that follows.

This is another reminder that pricing is not just numbers. Psychology and communication play their part too.

You need to understand your cost base, your capacity and your time availability. Without those, you are pricing largely blindly.

Use our free service pricing calculator

You do not have to do all the number crunching yourself.

Our free service pricing calculator lets you enter your costs, desired profit and available time to see what those numbers mean for your pricing rates.

You can change the assumptions and run different scenarios. If you work fewer weeks, change your available hours or aim for a different level of profit, you can see the effect on the rate you need to charge.

The calculator gives you a floor based on your costs and another rate that takes your target profit into account.

You can also use our profit and discount calculator, pricing and discounting calculator and break-even calculator to test other pricing and profit decisions.

FAQs

How do I calculate pricing rates for my services?

Start with your business costs, add the profit you want to make and divide that by your realistic billable capacity. Use the result as a financial reference point, then consider your customers, market, proposition and business objectives.

Should I include paying myself when calculating my rate?

Yes. Your business needs to support you as well as paying its other costs. Leaving your own reward out can make the rate look more profitable than it really is.

Are all my working hours billable?

No. Marketing, administration, business development, customer support and other activities take time but may not be directly chargeable. Your rate needs to reflect the time you can realistically sell.

Do I need an hourly rate if I charge by project?

It is still useful to know one. Even if the customer sees a fixed project price, understanding the likely time and resources required helps you judge whether that quote works financially.

Should I use competitor prices to set my rates?

Competitor pricing gives you useful context, but it should not replace your own numbers. A competitor may have completely different costs, capacity, customers and objectives.

Is discounting always bad for profit?

No. Discounting can be useful when it supports a clear objective, such as filling spare capacity or introducing new customers to the business. The important thing is knowing the financial impact before reducing the price.

Episode Timecodes

00:28 – How much should you charge?
01:23 – Introducing the ONC pricing framework
02:16 – What your pricing says about your business
03:05 – Objectives and business purpose
06:00 – The numbers behind your pricing
09:31 – Time, capacity and billable hours
11:34 – Calculating a charge-out rate
12:00 – Using the free service pricing calculator
13:56 – Cost-based, value, premium and competitor pricing
16:33 – Discounting, bundle pricing and anchor pricing
18:55 – Bringing Objectives, Numbers and Choice together
20:11 – Two practical actions to take after the episode

Related episodes

Key takeaway

Good pricing starts before you choose the final number.

Be clear about your objectives and what you want the business to achieve. Know your costs, decide what you want the business to make and understand how much time you can realistically sell. Then choose the pricing approach that fits your customers and your proposition.

The two practical actions from this episode are simple. Write down your business costs and think about how much you want the business to make.

Then ask whether the resulting price supports the business you are trying to build.

Plan it, Do it, Profit.

Further Support

If you want to work through your own pricing numbers, start with our free service pricing calculator. Add your costs, target profit and available time, then test how different assumptions affect the rate you need to charge.

If you need help with pricing, profit, costs or understanding the numbers behind your business, you can contact us for an initial chat.

You can also watch more practical finance and business support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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https://www.ihatenumbers.co.uk/simplifying-accounting-and-tax-i-hate-numbers-podcast/

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How to Calculate Pricing Rates for Your Services