How to price a service business

You priced it by looking sideways, not down

Here's how most service businesses end up with the prices they've got. You looked at two or three competitors, noted what they charged, and picked a number somewhere in the middle. Maybe a bit under, because you were new and didn't want to look cocky. Then you adjusted it until it felt bearable, low enough that saying it out loud didn't make you wince, high enough to feel like you weren't giving your time away.

That's not a pricing strategy. It's a guess wearing a strategy's clothes. And you already suspect it. You're doing the same work you did a year ago, you're better at it now, your calendar is full or close to it, and the number on your invoice hasn't moved much. Putting it up feels risky, because you don't actually know why the number is what it is. If you don't know why it's right, you can't know whether moving it is safe.

What pricing properly actually means

Properly means this: your price is set by working out what the job is actually worth to the person paying for it and what it actually costs you to deliver it well, not by what the business next door happens to be charging. Competitors' prices tell you almost nothing about your costs, your time, or what your customer is getting out of the result. They're a number someone else picked, possibly for the same flawed reasons you picked yours.

The method, step by step

You can do this on paper in an afternoon. Here's a worked example using a mobile bookkeeper, we'll call her business "Ledger Right" for the example, this is not a real client, just a plausible one to show the maths.

Step 1: Work out your real hourly cost, not your rate

Add up everything it costs to run the business for a year: software subscriptions, insurance, a portion of your car if you drive to clients, professional fees, any admin time you don't bill for. Then work out how many hours you can actually bill in a year, not how many hours exist in a year. Ledger Right works out she has 46 working weeks after holidays and sick days, and realistically bills 20 hours of a 35 hour week, the rest goes to admin, invoicing, and finding new clients. That's 920 billable hours a year. Her running costs come to $9,200 a year. That's $10 an hour just to break even before she's paid herself a cent.

Step 2: Decide what you actually want to earn

Not what feels greedy to write down, what you need this business to pay you, including the parts of a wage a job would normally give you: sick leave, annual leave, super. Ledger Right wants the equivalent of $75,000 a year for herself. Divided across those 920 billable hours, that's just over $81 an hour. Add the $10 running cost and her floor price, the absolute minimum she can charge without slowly going backwards, is around $91 an hour.

Step 3: Work out what the job is worth to the client, separately from your cost

This is the step almost everyone skips, and it's the one that matters most. What does the client get if this goes well? For a bookkeeper, it's not "an hour of data entry", it's accurate books that mean tax time isn't a nightmare, that a business owner can see their own numbers and make decisions with them, that mistakes don't cost them a fine later. That's worth more to a business owner than the mechanical hour it takes to produce it. This is the gap between cost-based thinking (what does my time cost) and value-based thinking (what does the outcome save or make the client).

Step 4: Set a price between the floor and the ceiling, and test it on one new client first

Your floor is step two. Your ceiling is roughly what a client would pay to avoid the pain of not having this done properly, which you can estimate by asking what it costs them if it goes wrong (a late lodgement penalty, hours of their own time redoing it, a stressful audit). Ledger Right settles on $110 an hour for new clients, comfortably above her floor, well under the cost of the mess she prevents. She keeps existing clients at their current rate for now and only applies the new number going forward. That's the safe way to test a price rise: on new work, not by ripping up existing agreements overnight.

What good looks like, versus what most people produce

Most pricing exercises stop at step one, if they get that far. People know roughly what they charge and roughly what it costs to run the business, but they've never written down the number where those two lines cross. A good pricing exercise ends with three concrete things on paper: a floor number below which you are genuinely losing money, a target number that pays you what you actually want to earn, and a one-line explanation of what the client is really buying, in their words, not yours.

What most people produce instead is a single number picked by feel, with no floor and no explanation. That number can survive a quiet month. It can't survive a bad year, a slow patch, or a client who wants a discount, because there's nothing underneath it to argue from.

Three mistakes that make the whole exercise useless

The first is skipping step one and starting from step three. Knowing your value but not your cost means you can still price yourself into a loss, because a great result delivered under your floor is still a business slowly running out of money.

The second is using your busiest week as the baseline for billable hours. Ledger Right's 20 billable hours a week is an average across a real year with quiet stretches, not her best week extrapolated. Pricing off your best week means every normal week feels like you're falling short of a number that was never realistic.

The third is doing the exercise once and never touching it again. Your costs change, your skills improve, the market you operate in moves. A price you set two years ago and haven't looked at since isn't a considered price anymore, it's an old guess wearing a newer coat of paint.

What to actually do with it once it's written

This is the part most articles skip: having the numbers on paper doesn't change anything until you use them somewhere a client can see. Turn the floor, the target, and the value explanation into an actual offer, a clear description of what's included at each price point, so a prospective client understands what they're paying for before they ask what it costs. Apply the new number to new enquiries first. Give existing clients advance notice if you're moving them across, most people take a heads up better than a surprise. And put a date in your calendar, six or twelve months out, to run the same four steps again, because the number that's right today won't stay right forever.

Doing this properly takes an afternoon, sitting down with your real costs and working through each step honestly. If you'd rather have it done for you, a Offer Stack & Pricing built from your own answers is $99.