TL;DR
If you set your prices based on what competitors charge, you're doing it wrong. Here's a framework for pricing services that covers your costs, pays you well, and doesn't scare off clients.
I see this constantly with service businesses. They pick a number that feels right, check what a couple of competitors charge, and land somewhere in the middle. Then they wonder why they're working 60-hour weeks and still not profitable.
Pricing isn't guessing. It's math plus positioning. Let me walk you through how to do it properly.
Start With Your Costs
Before you can price anything, you need to know what it costs you to operate. Not just the direct costs of delivering the service, but everything.
Add up: your salary (what you need to take home), employee wages and benefits, rent, insurance, software, marketing, professional fees, vehicle costs, and every other overhead line item. For a typical service business doing $800K in revenue with a team of five, total costs might be $650K per year.
Now divide by your total billable hours. If you and your team can deliver 4,000 billable hours per year, your cost per hour is $162.50. That's your floor. Anything below that and you're subsidizing your clients with your own money.
Add Your Margin
Your floor rate keeps you alive. Your margin keeps you growing. Most healthy service businesses target 15% to 25% net margin. Using our example, a 20% margin means you need to generate $812K in revenue on those 4,000 hours, or $203 per hour.
That's your minimum blended rate. Some services will be higher, some lower, but the average across your business needs to hit that number or you're slowly going backwards.
Value-Based Pricing
Cost-plus tells you the minimum. Value-based pricing tells you what you should actually charge.
Here's what I tell my clients: the price of your service should reflect the value it creates, not the time it takes. If your consulting engagement saves a client $200K per year, charging $30K for it is reasonable even if it only takes you 80 hours. That's $375 per hour and the client is still getting a 6x return.
The businesses that make real money in services figure out which problems they solve that have the biggest financial impact, and they price accordingly. A bookkeeper doing data entry charges $50 per hour. A CFO who restructures a business to save $100K in tax charges $300 per hour. Same profession, different value.
Stop Hourly Billing
Hourly billing punishes you for being good at your job. The faster you get, the less you earn. That's backwards.
Move to project-based or retainer pricing. Scope the work, estimate the effort, add your margin, and quote a fixed price. The client gets cost certainty. You get rewarded for efficiency. A study by Simon-Kucher found that 80% of businesses could raise prices by 2 to 5 percent without losing customers. Most businesses have more pricing power than they think.
When to Raise Prices
If you haven't raised prices in the last 12 months, you've taken a pay cut. Inflation in Canada has been running 2 to 5 percent per year. Your rent went up. Your software subscriptions went up. Your team's wages went up. Your prices need to follow.
Here's how to do it without losing clients. Give 60 days written notice. Explain what's changed (costs, scope, value added). Apply it to the next contract cycle or renewal date. If a client leaves over a 5% price increase, they were never a good client.
The Pricing Mistakes I See
- Pricing to match competitors. You don't know their cost structure. They might be losing money.
- Discounting to win work. Every dollar you discount comes straight out of profit. A 10% discount on a 20% margin business cuts your profit in half.
- Not quoting fast enough. If it takes you two weeks to send a quote, the client has already found someone else. Same-day quotes win work.
- One price for everyone. Your best clients, the ones who pay on time and don't cause headaches, should be getting your best work at fair prices. Problem clients should be paying a premium or shown the door.
What to Do This Week
- Calculate your cost per hour. Total costs divided by total billable hours. Be honest about how many hours are actually billable.
- Check your effective rate. Pull your last quarter's revenue and divide by hours worked. If your effective rate is below your cost rate, you have an emergency.
- Identify your most profitable service. Which offering has the highest margin? Do more of that. Which has the lowest? Fix the price or drop it.
- Raise prices on one client this month. Start with the one who's been on the same rate the longest.
The Bottom Line
Your price tells the market what you're worth. Set it too low and you attract clients who don't value what you do. Set it based on your costs and the value you deliver, and you'll work less and earn more. If you need help figuring out your pricing, book a free call.
Next step: run the numbers in the free breakeven calculator.
Frequently Asked Questions
- How do I calculate my minimum hourly rate?
- Add up all business costs (salary, overhead, taxes, benefits) and divide by billable hours. If your total costs are $180K and you have 1,500 billable hours per year, your floor rate is $120 per hour. Charge below that and you're losing money.
- Should I charge hourly or project-based?
- Project-based pricing is almost always better for service businesses. It rewards efficiency, gives clients cost certainty, and allows you to capture more value as you get faster at delivering results. Hourly billing penalizes expertise.
- How often should I raise my prices?
- At minimum, once per year. Inflation alone erodes your margins by 2 to 5 percent annually. Review pricing every January and apply increases to new contracts. Existing clients should get 60 days notice before their renewal.
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