How to price a service business
Start with the floor, and be honest about billable hours
The floor is the rate below which the business does not survive. It is not a price and you should rarely charge it, but you cannot price sensibly without knowing where it is.
Add up everything the business costs in a year: your own market salary (not what you happen to draw), any staff, rent, software, insurance, professional fees, equipment, and a margin for the gaps between engagements. Then divide by the hours you can actually bill.
The billable-hours number is where most people go wrong. A year is around 2,000 working hours before leave. After sales, proposals, admin, invoicing, training and the hours nobody pays for, a solo consultant typically bills somewhere between 1,000 and 1,300 of them. Dividing your costs by 2,000 sets a floor roughly 40% below the real one, and every quote from then on is quietly loss-making.
For a GST-registered service business, remember the price you quote and the money you keep are different numbers. Quote exclusive of GST and say so, or the tax comes out of your margin the first time a client assumes it was included.
Choosing the pricing model
The three common models are not interchangeable. Each transfers risk differently, and the right one depends on who is better placed to carry the risk of the scope changing.
| Model | Who carries scope risk | Use when | The failure mode |
| Hourly | Client | Scope genuinely cannot be defined — discovery, ongoing support, litigation-style work | Punishes you for getting faster; caps income at hours available |
| Fixed fee | You | Outcome is definable and you have done it before | Scope creep destroys the margin unless the boundary is written down |
| Retainer | Shared | Value is availability and continuity, not a deliverable | Drifts into unlimited work; needs a stated scope and a review date |
| Value or outcome-based | Shared | The result is measurable in money and largely attributable to you | Attribution disputes; needs an agreed measurement before you start |
Notice what the second column implies. Hourly billing is the model that most protects you and least rewards you, because it ties your income to time and penalises expertise: the faster you get, the less you earn for the same result. Most service businesses should be moving work from hourly to fixed fee as they gain repetition, not the other way round.
Pricing on value rather than effort
A client does not buy your hours. They buy a change in their situation, and the price they will accept is anchored to the size of that change, not to how long it took you. Two pieces of work that take the same time can be worth very different amounts.
The practical way in is to ask, before quoting, what the work is worth if it succeeds and what the situation costs if nothing is done. A filing that avoids a penalty, a process change that frees a person, a system that shortens a collection cycle — all of these have a number the client can estimate, and a fee that is a visible fraction of that number is far easier to accept than the same fee justified by a timesheet.
- Ask what happens if this is not done. The answer is the value of the work.
- Quote a fee, not a rate, whenever the outcome is definable. A rate invites a conversation about hours; a fee invites a conversation about the outcome.
- Offer two or three options at different scopes and prices. It moves the conversation from whether to buy to which to buy, and the middle option tells you what the client actually values.
- Never discount without removing something. A price that falls when pushed was not a real price, and every future negotiation starts from that discovery.
Raising prices on existing clients
Most underpricing is historical: a rate set years ago that has never moved, on a client relationship you do not want to risk. The risk is usually smaller than it feels, and the cost of not raising is compounding.
- Give notice. A change effective in sixty or ninety days is a business decision; one effective on the next invoice is a surprise.
- Change the price, not the story. A short, factual note that rates are moving from a date works better than a lengthy justification, which reads as an invitation to negotiate.
- Raise new-client prices first. It gives you evidence the market accepts the number before you test it on relationships you value.
- Expect to lose some. If nobody objects, the increase was too small. Losing the least profitable client at a higher rate usually improves both income and capacity.
A useful annual habit: recalculate the floor every year, because your costs move even when your prices do not. Inflation alone means a rate held flat for three years is a real-terms price cut you never decided to make.
Frequently asked questions
Should I put prices on my website?
Publishing a starting price filters out enquiries that were never going to convert, which is worth a great deal when you are the one taking the calls. Publishing a full price list works only where scope is genuinely standard. A stated minimum engagement size is usually the best compromise.
How do I quote when I do not know how long something will take?
That is exactly the case for either hourly billing or a paid discovery phase. A short, separately priced piece of work that defines the scope lets you quote the main engagement as a fixed fee with confidence, and the client gets a usable deliverable either way.
Is it wrong to charge different clients different prices?
It is normal, provided the difference reflects scope, risk, urgency or value rather than what you guessed each client would tolerate. Be aware that clients talk, so any difference should be one you would be comfortable explaining.
Should my price include GST?
Quote exclusive and state it, unless you are dealing with consumers who expect an all-in number. Being explicit prevents the tax being absorbed into your margin, and it makes your price comparable to that of other registered suppliers.
Where to go next on this site
- What Should I Charge Per Hour — The arithmetic of the floor, with your own numbers.
- Break-Even on a Fixed Cost Base — How many engagements at your price cover the base.
- Profit Margin Calculator — What a given price leaves after cost.
- Break-Even Calculator — Volume needed at a chosen price and margin.
- GST Invoice Calculator — What the client pays once tax is added.
- Can I Afford to Hire — Capacity is the other half of pricing — what a person costs to add.
Sources
- GST portal — Registration thresholds and invoicing requirements for services