How To Price A Service Business
Cost-plus pricing guarantees you cover costs and guarantees nothing else.
Most small service businesses price by calculating costs and adding a margin. It is defensible, it is simple, and it systematically leaves money on the table while making it impossible to explain your price.
What is wrong with cost-plus
Your costs are a fact about you, not about the value of the work to the client. Two clients receiving identical work may derive wildly different value from it, and cost-plus charges both the same.
It also punishes efficiency: as you get better and faster, cost-plus reduces what you can charge for the same result.
Price the outcome
The alternative starts from what the work is worth to the buyer. What does solving this problem save or earn them, and what would it cost them to solve it another way?
This requires conversations about the client's situation before quoting, which is itself valuable — it produces better-defined engagements and filters out clients for whom the work is not worth doing.
The floor and the ceiling
Costs still matter. They set the floor below which work destroys value, and that floor must include your own time at a rate you can sustain, plus the unbillable time spent selling and administering.
Undercounting unbillable time is the most common error in service pricing. If half your week is not billable, your billable rate must carry the whole week.
Options rather than a number
Presenting a single price invites a yes or no. Presenting three defined options — different scopes at different prices — changes the conversation to which one, and gives the buyer a way to choose more rather than less.
Raising prices
Raise on new clients first, where there is no relationship to renegotiate. Give existing clients notice and a reason, and expect to lose a small number. If you lose none, the increase was too small.
Track what you actually recover
Measure realized revenue per hour actually worked, including the unbillable hours. It is frequently very different from the headline rate, and it is the number that tells you whether the pricing works.