As a small business, learning how to price a service can be complex. With so many considerations involved, where do you begin? A great first step is market research, looking at the relevant pricing strategies and formulas to simplify setting costs. By understanding the factors that influence your prices, from client expectations to competitor rates, you can create informed prices for your services. To help you get started, we’ve created a guide that looks deeper into how to price your services. Learn more about profit margins, cost calculations and pricing models, and take a look at examples of different industries for tailored strategies.
How to price a service: a quick overview
Setting the right price brings a number of benefits to your business. It can, for example, help you enter saturated markets with service prices that compete with established brands. It can also enable you to meet target market expectations and secure sales, generating the profit needed to grow your business. To learn how to price a service, we’ve outlined key steps to help simplify the process for you, including:
Formulas to help price your services.
The importance of covering your business costs.
Psychological pricing tactics.
Value propositions and market demand.
4 different pricing models.
We’ll also look at additional considerations, like value-added tax (VAT) and your small business goals, so you can feel confident creating a price that’s right for your services. If you’re offering products instead of services at your small business, take a look at our guide on how to price a product for more guidance.
Understanding the basics of pricing a service
Whether you’re starting a side hustle or running a limited company, different factors will affect how you price your services. Let’s take a look at some of the key influences of pricing to get started.
Creating a positive profit margin
When pricing services, you need to cover your business costs to ensure a healthy profit margin. These costs are the necessary business expenses you’ll incur when running your business.
Your profit margin refers to the amount of revenue which can be classed as profit after you’ve removed business costs. A positive profit margin indicates you’re earning enough revenue to cover your small business expenses.
If your small business is seeing a negative profit margin and can’t cover your business expenses, it could be because your:
Services are priced too low.
You don’t have enough clients.
Your services are too heavily discounted.
Your business expenses are too high.
You’re issuing too many refunds.
Before you create a price, consider all of the costs involved in providing your services. This includes fixed and variable costs:
Fixed costs: Business costs that remain the same no matter how many sales you make.
Variable costs: Costs that fluctuate depending on how many sales you make.
We’ll look at each in more detail when discussing how to price services using key steps later in the article.
Considering time invested
The time you invest in providing a service for your customers will influence how much you charge. For example, let’s say you’re looking at how to start a business from home and decide to start a nail art business. For each client who books an appointment, you’ll be investing time into painting their nails. You’ll also have invested time when training to become a nail technician and gaining the correct qualifications. This should be factored into the price, too, alongside any expenses you incurred while training. If you’re a new merchant without much nail art experience, you might decide to charge less for your time when you first start your business. As you gain experience and a positive reputation, you might be able to increase your prices for your services. The ability to increase your service price is also dependent on other factors, including market conditions, inflation and demand. The cost of your time should be added on top of your business costs. This ensures you’re earning an income for the hours you work.
Quotes or fixed prices
When you set a price for services, you can apply a fixed price or create quotes for your clients.
A fixed price remains constant for the services provided.
A quoted price is an upfront price agreed upon before the project begins.
An estimate is a forecast of what you expect the service will cost the client, though it isn’t binding.
For example, if you’re a personal chef, you may charge £20 an hour for all clients regardless of the services involved. Alternatively, you could set fixed prices for set menus, making the costs of your services clear upfront. The alternative to a fixed price is a quote. This allows you to generate different prices for different clients based on the project brief. You can then vary your prices based on:
The time you’ll invest, including planning the menu, travel and food preparation.
The skill level required and the complexity of the dishes requested.
The materials needed, including ingredients and specific kitchen appliances you may need.
Quotes are useful when the time, skill and costs of fulfilling orders fluctuate. However, they are time-consuming to create. If you take multiple orders every day, you might find it difficult to keep up with personalised quotes. Look into delegating the task to other team members, using a spreadsheet to adjust costs and time invested for an automated calculation, or software for generating quotes to improve efficiencies will save time and internal resources. Fixed rates are simpler and require less admin time. Just be sure you’ve accounted for variations in time, skill and cost before the pricing of services.
How is service cost calculated?
Service cost calculations can help to simplify the process of pricing services for your small businesses. Working with the considerations mentioned above, these formulas use costs and time invested to set accurate prices. Alongside formulas, you may have to review factors like location, demand and competition. Your final rates are often a balance between your service cost calculations and the price your customers are willing to pay. One of the most common formulas used when looking at how to price a service involves setting a fixed profit margin. This is added to your costs, ensuring you generate additional revenue after your expenses are covered, using the following formula:
Service price = direct costs + profit margin |
Some merchants - like tutors and therapists - prefer to charge per hour rather than per project, looking at time invested and costs. This ensures you’re paid for the exact time you work and sets client expectations as to the length of the services. If you’re charging per hour, you’ll use the calculation:
Turnover = business profit + expenses + tax Hours worked = Chargeable hours Hourly rate = turnover/chargeable hours |
Each of these formulas takes into account small business expenses when setting prices, which is essential for ensuring your pricing covers your costs and you can be in a strong position to remain profitable.
Understanding psychological pricing tactics
Psychological pricing is a method of setting prices to influence a customer’s subconscious, guiding them towards specific purchases. These strategies cultivate perceptions of good value and exclusivity among target audiences, using emotional triggers and bias to increase sales. When looking at how to price a service, the most common psychological strategies include:
Price anchoring
If you offer tiered pricing (different prices for different levels of service), you can use price anchoring to influence purchasing choices. This involves presenting your highest price first. When clients view your additional prices, they’ll appear cheaper next to your first option.
Charm pricing
The popular method of ending a price with £0.99 is based on left-digit bias, in which customers are likely to base their perception of a price on the left digit. So, when you price a service at £9.99, customers could view it as closer to £9 than £10.
Odd-even pricing
Similarly to charm pricing, odd-even pricing focuses on the last digit. For this method, an odd last digit can encourage customers to view the price as a good deal, such as a pub advertising a pizza and a drink for £9.95. An even last digit can indicate luxury.
Price bundling
This involves combining multiple services for a cheaper price, encouraging customers to buy more and increasing average order value (AOV). It can also create key upselling opportunities, in which you encourage add-on purchases that are similar to the primary purchase. Psychological strategies aren’t essential when looking at how to price services, but they can be useful for boosting sales and directing customer attention towards your most profitable services. Try testing different psychological pricing methods and using sales insights to find your best-performing strategies.
4 things to consider when choosing a service pricing model
An informed service price can influence your sales, profit margin and business positioning. Let’s take a look at some key considerations to remember:
Market demand
Supply and demand are key factors in every service pricing strategy and should be a focus when looking at how to write a business plan. Generally, the higher the demand, the higher you can price your small business service. If supply exceeds demand, you may need to lower your prices. For example, if you open a salon in a village without an existing hairdresser, demand is likely to be high. You might be able to charge more than the average service cost for your haircuts as there’s no local competition. It’s important to balance demand with other factors. These include target audience expectations and value propositions (both of which we’ll discuss later in the article). Even with high demand, if you price a service without considering these factors you could end up pricing yourself out of the market. This happens when your prices are too high for your target audience, causing a decline in sales.
Value proposition
Your value proposition is a short statement summarising what you offer your target customers. It should focus on:
The benefits of your services.
The pain points that your services address.
Your areas of expertise.
Your value proposition can also include your unique selling proposition (USP). For example, if you offer pet grooming, you might specialise in rescue dogs that need a calm, understanding service from an experienced groomer. A unique value proposition is likely to create more demand. This is why businesses that offer a clearly defined USP can often charge more for their services, as customers will see more value in the business.
Customer loyalty
In the wake of the cost of living crisis, almost 70% of UK consumers report being less loyal to brands since the cost of living crisis. A third of those also state that low prices are now more important than brand loyalty. This doesn’t mean that customer loyalty no longer matters. Instead, it shows that your business might need to look at how to price a service competitively in order to retain your customers. Luxury and bespoke services can often be exceptions to this. One solution is offering a range of service options to suit different budgets. The services that require fewer business costs can be priced lower, helping boost profits and customer loyalty without restricting your full range of service offerings. For example, if you’re a personal trainer, you can offer your clients different session times. The quicker their session, the less time you invest and the lower the cost. You might also offer a budget-friendly session completed in a permitted outside area - like a park - rather than in a gym, reducing your venue costs. Be sure to check legal requirements before running your business activities from a public area.
Business goals
Balancing how to price your services with your business goals is crucial to your small business growth. When reviewing costs, for example, it’s important to consider short-term expenses alongside long-term costs. Let’s say that you start a business from home offering beauty treatments as a sole trader. Short-term costs might include the price of your materials and the cost of utility bills. However, you know you want to expand in the next year and buy a studio. The cost of this goal could be factored into your current pricing. Consider what profit margin is required to create enough gross profit ie. profit after business costs are deducted, to buy or rent a studio. Other goals that can influence service pricing include:
Creating exclusivity around your business image.
Customer acquisition targets.
Target sales.
The target demographic you’re hoping to attract.
How to price services in 9 steps
Pricing your services correctly is crucial for securing sales, competing with other merchants and building a profitable small business. To help guide your pricing, we’ve outlined 9 key steps to follow:
Carry out market research.
Conduct a competitive analysis.
Calculate your costs.
Calculate and set your profit margin.
Adding VAT.
Choose your service pricing model.
Test and collect feedback.
Launch and communicate your pricing.
Review periodically.
Let’s take a look at each in more detail.
Carry out market research
Market research involves analysing customer trends and behaviour in your industry. This is important when understanding more about supply and demand, and can also give you important insights into:
What prices are your audience currently paying for similar services?
What USPs are your customers willing to pay more for?
Which services appeal to different demographics?
Trending services and industry disruptors.
By gaining a better understanding of how your audience shop and what drives their purchasing decisions, you can create customer-focused pricing that appeals to your target customers' expectations. When it comes to how to do market research for a small business, we recommend:
Carrying out surveys of target customers.
Sending feedback forms to existing customers.
Using online research (from paid-for or public access sources).
Tracking brand and product mentions on social media.
To gain current insights, look into online reports from reputable resources discussing the state of your industry. If you own a hair salon, for example, NHBF publishes yearly reports for the hair, beauty and barbering industry.
Conduct a competitive analysis
Competitor analysis helps you set a price for services that reflects your market position. For example, if you’re positioning yourself as a luxury and exclusive small business, your prices are likely to be above average to reflect your brand image. If you’re charging the same as a business with an affordable market position, customers may wonder how you can afford to provide a luxury service. To determine competitor pricing, gather information on the rates of similar businesses. You can do this by looking at online businesses or visiting brick-and-mortar locations.
When analysing competitor pricing, be sure to look at factors that can influence rates, including:
Who the business is targeting.
The services they’re offering at different price points.
Any USPs that the business markets.
You can also learn more about your competitors through how other small businesses are using social media as well as customer reviews to identify whether customers believe the services were priced correctly.
Calculate your costs
To calculate business costs, make a record of all your fixed costs and payments. These can include:
Rent payments.
Fixed utility bills.
Staff payroll.
Insurance payments.
Small business loan repayments.
Then review your variable costs, which will fluctuate depending on how many sales you make. For service-based businesses, these can include:
Transport (such as public transport or fuel costs).
Additional labour.
Raw materials.
Transaction fees.
Calculate your fixed and variable costs to understand your monthly expenses. This will be the amount you need to make each month in order to break even.
Calculate and set your profit margin
Once you know your total costs, you can calculate a profit margin to generate gross profit. There are a few options for setting your profit margin. The first is to set a standard profit margin so that you can start selling quickly. The average profit margin for service businesses in the UK is currently around 15%. Another strategy is to look at your closest competitor's profits. By assuming that similar businesses have similar costs, you can calculate how much they’re adding to their customer-facing prices to estimate their profit margins. There’s also the option to set a desired profit and calculate your margin. To do this, use the formula:
Net profit margin = [net profit/revenue]*100 |
As you begin sending invoices and creating revenue, track your profits and adjust your margin accordingly.
Adding VAT
VAT is a tax added to applicable products and services sold by VAT registered businesses. As a merchant, you need to add VAT to your services once you make a turnover of more than £90,000 in 12 months. This also applies if you expect to reach a turnover of £90,000 in the next 30 days. To register for VAT for small businesses, visit the HMRC website within 30 days of reaching (or expecting to reach) the £90,000 threshold. Once registered, add VAT to your applicable services by following these steps:
Calculate new prices using the relevant VAT rate for your services.
Detail VAT as a separate cost on your invoices.
Include your VAT number on your invoices.
Record your VAT and submit VAT returns.
Pay your VAT bill
Staying up to date with VAT rate changes is your responsibility as a small business owner. Be sure to check rates regularly and update your prices in line with any changes.
Choose your service pricing model
Pricing models are a brilliant way to guide your pricing strategy. To choose the right option for your business, we’ve taken a look at some of the most useful when pricing services as a small business owner.
Value-based pricing
If you have a service with a clear USP, you can use value-based pricing. This method uses your target audiences’ opinions of your USP and how much they’re willing to pay to set your prices. For example, if you provide a service of cleaning homes, you might have a USP of low noise disruption. Your target audience includes people who work from home and people with noise sensitivity, such as those with autism. As you don’t have any competitors offering the same service, you use value-based pricing. Ask members of your target audience how much they’d pay for a low-noise service, using their answers to calculate a reasonable price for your USP.
Cost-plus pricing
Cost-plus pricing is an effective strategy if you have a clear understanding of your small business expenses. In particular, you need to know the cost that goes into an individual service. For example, if you offer dog walking, begin by outlining your costs per dog walk. These include a percentage of expenses for your insurance payments and supplies, such as your leads and portable water bowls. It also includes the expenses for each walk, such as food supplies and transport. Added to the total costs is a markup percentage, ensuring you earn a profit margin on each walk. To follow cost-plus pricing, use the formula:
Cost-plus price = service cost x markup percentage |
Hourly vs project-based pricing
From taxi drivers to beauticians, many business models can benefit from choosing between hourly and project-based pricing when researching how to price a service. To determine your best option, let’s take a quick look at each:
Hourly pricing: You charge per hour, ensuring you’re paid accurately for the time you spend working.
Project-based pricing: You charge for the project as a whole, usually agreed with an upfront quote. This works well for more experienced merchants who can accurately calculate the time needed to complete a project.
Project-based pricing is better for giving customers an accurate look at how much they’re going to spend on merchant services before the project begins. It also rewards efficiency. Complete a project quicker than expected and you still receive the same pay. However, it’s crucial you have the experience needed to avoid underestimating a project. Hourly pricing is more suitable when you don’t know how long a project will take. This is especially useful if there are external factors that you can’t control. For example, a lawyer might have an unpredictable amount of time needed for research.
Penetration pricing
For businesses facing a lot of competition, consider lowering your prices using the penetration pricing strategy. This is particularly useful for businesses without a USP. For example, if you’re a wedding photographer, you might be competing with many other local photographers. By opting for penetration pricing, you set cheaper rates when you enter the market. This helps you appeal to an audience looking for budget-friendly photography and gives your audience a reason to choose you over a more established photographer asking for a higher price for their service. As you build a reputation and earn customer loyalty, you can increase your service pricing for a bigger profit margin. Do note that you still need to earn enough money to manage your cash flow (money coming in and out of your business) and ensure you can cover your expenses.
Test and collect feedback
Once you’ve set a price for your services, test your costs with your target audience. You can do this by collecting customer feedback. Asking clients if they think your prices align with the value offered through your services is a great way to review your strategy. Other methods for testing the success of your pricing include:
Tracking your sales.
Ensuring you can cover your business costs.
Monitoring gross profit.
Launch and communicate your pricing
Clearly communicating the value of your services ensures customers understand your pricing. This is especially important when you’re priced slightly higher than competitors. There are plenty of ways you can communicate the value behind your pricing, including:
Detailing your USP in all online and offline copy.
Reflecting your USP in your branding.
Adding images to your online store or physical premises to show the results of your services, such as before and after images of teeth for dental services.
Adding a value proposition statement to your print media.
Including testimonials on your online store.
Applying for relevant credentials.
Highlight the benefits and offer proof of your value to help customers understand your pricing.
Review periodically
It’s important that your pricing remains flexible to meet a changing market and respond to economic fluctuations. Review your strategy periodically to ensure it’s still aligned with your business goals, meets customer expectations and helps you stay competitive. There are many reasons that prices can fluctuate, including:
Inflation and recessions.
Shifts in market demand.
New competitors entering the market.
Current competitors changing their prices.
You can see shifts in your costs, too. For example, if you’re a tattoo artist, your ink supplier may increase their prices to match an increase in the demand for ink. This would have a knock-on effect, pushing your business expenses higher. To meet rising costs, you’d have to consider increasing your service prices.
Common service pricing models by industry
After learning how to price services, it’s wise to consider how you’ll charge your customers. Is your small business better suited to day rates or annual subscriptions, for example? Common pricing models can vary across industries, changing the way you present your prices. To learn more, we’ve taken a look at some examples.
Beauty and wellness
Prices are usually per treatment, though memberships (monthly or annual) can be used to encourage customer loyalty.
Tutors
Sessions can be priced by the hour, setting client expectations as to the price and time of your services. You could also offer price bundling, allowing multiple sessions to be booked in advance at a discounted rate.
Freelance writers
Often writers charge per word, ensuring they’re paid for the entire scope of the project. You can also use project-based pricing or day rates to set fixed fees for your services.
Dog walker
You’ll often see costs set for timed walks, such as £10 for a 30-minute walk. To encourage repeat business, offer price bundling of walks to reward clients who book in advance.
Taxi driver
As there are a number of external factors affecting how long it takes to travel a certain distance, charging for time spent driving is a popular strategy. Many taxi drivers also add a flat rate before the journey starts to cover costs, such as the fuel and time needed to arrive at the destination.
Gardener
You might have set rates for common gardening jobs, like mowing the grass or planting seeds, as well as an hourly rate for any other work. For regular customers, you have a set monthly fee for maintaining their garden, regardless of the services needed.
These are just a few examples of how to price your services. For more methods that are specific to your industry, take a look at how your competitors are pricing their services. Once you’ve calculated your costs, worked out your profit margin and chosen your pricing model, you’re ready to start selling.
Disclaimer: The contents of this page are intended for informational purposes only and should not be construed as professional advice. For matters requiring legal or financial expertise, it’s recommended to seek guidance from qualified professionals.
How to price a service FAQs
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