Pricing rates can be difficult to get right. Charge too much and you may lose customers. Charge too little and you can end up working hard without making enough profit to build a sustainable business.

Your price also sends a message. It says something about your business, your position in the market and the value you believe you provide. That is why pricing is not just a calculation.

In this episode, we use a simple framework called ONC: Objectives, Numbers and Choice. It helps us think about what we want our pricing to achieve, the numbers behind the price and the pricing options available to us.

About this episode

How much should you charge for your products or services?

The short answer is: it depends.

There is no single price point that works for every business, every customer or every situation. Your pricing sits somewhere between a floor and a ceiling.

The floor is the bare minimum you should be considering. The ceiling is the maximum your customer is willing to pay based on what you provide to them.

Where your price sits between those two points depends on your objectives, your costs, the profit you want to make, your capacity, your customers and the proposition you put in front of them.

The principles can apply to products as well as services, but the practical focus in this episode is on service businesses.

The ONC approach to pricing rates

Pricing is a blend of numbers, psychology, communication and business objectives. Businesses change and refine their pricing over time, but the basic principles remain.

Our ONC framework gives us three places to start:

• Objectives: What are we trying to achieve?
• Numbers: What does it cost to run the business, how much profit do we want and how much capacity do we really have?
• Choice: Which pricing approach fits the business, customer and proposition?

Objectives: what do you want your pricing to achieve?

Before reaching for a calculator, think about the purpose of your pricing.

What are you trying to achieve over the next 12 months, two years and beyond?

If you want to build a larger audience or make your services accessible to more people, the highest possible price may not support that objective.

If you run a social enterprise, wider reach may be important because you want to help and support more people.

If you are building a lifestyle business, you may deliberately limit your working hours and choose a price that supports the income and lifestyle you want rather than trying to conquer the world.

If you want to position yourself as a high-quality or premium service provider, your pricing needs to support that message too.

There is no one-size-fits-all answer. Start with where you want the business to go.

Numbers: know what your business needs to recover

You cannot make a sensible pricing decision without understanding your numbers.

Start by writing down the costs of running the business and delivering your service.

That may include website hosting, marketing, rent, freelancers, staff, utilities, storage, software and other business costs.

Do not forget yourself.

You need to factor in paying yourself from the business. If the business cannot support you as well as its other costs, it will be difficult to make it sustainable.

Look ahead as well. Think about what your cost base is likely to be over the next six to twelve months rather than relying only on what you spent last month.

Your customers ultimately need to provide enough income for the business to recover those costs.

Then we need another number: profit.

How much do you want the business to make above its costs?

That figure will vary depending on your business, your customers, your proposition and your own goals. The important thing is that profit is part of the calculation.

For a wider explanation of why this matters, see What Is Profit? Gross Profit and Net Profit Explained.

Your working week is not the same as your billable time

This is where service pricing can catch people out.

You may have 40 hours available for the business each week, but that does not mean you have 40 hours available to sell to customers.

Some of that time goes into keeping the business running. Marketing, administration, social media, business development, supporting customers and developing new services all take time.

If ten hours of a 40-hour week are needed for those activities, you may have around 30 hours left to deliver work to customers.

Then ask another question: how many weeks of the year do you actually want or expect to work?

Once we bring together costs, desired profit and realistic time capacity, we can start calculating a useful charge-out rate.

There are two useful reference points:

Cost floor = total business costs ÷ realistic billable hours

Target rate = (total business costs + desired profit) ÷ realistic billable hours

These figures do not mean you have to sell your services by the hour. If you charge by project, the time required to deliver that project still sits somewhere behind the quote.

Use your rate as a reference point, not a prison

Once you have a number, compare it with what is happening outside the business.

If the rate looks low compared with the market and your proposition gives customers strong value, you may decide there is room to increase your target profit.

If your rate looks too high compared with what customers are willing to pay, do not simply ignore the calculation. It may be telling you to look again at your costs, capacity or the way the service is delivered.

The calculation helps focus the mind. It gives you something to test rather than guessing.

Choice: which pricing approach should you use?

Once we understand our objectives and numbers, we can start choosing how we want to price.

The episode looks at several approaches. They are tools in the pricing toolkit rather than rules that every business must follow.

Cost-based pricing

Cost-based pricing starts with what it costs to provide the service and adds an amount on top, usually as a markup.

Its big advantage is simplicity. It is easy to understand and apply.

The weakness is that it is not necessarily market-led. If we simply accept our costs and add a markup, we may fail to challenge those costs or consider what customers actually value.

That can leave the business uncompetitive.

Our guide to How to Price Using Target Costing looks at a different way of connecting price, cost and profit.

Value and market-based pricing

Value-based pricing looks at the transformation or solution you provide.

What problem are you solving? What pain are you removing? What is that outcome worth to the customer?

This moves the conversation away from simply asking how long something takes and towards the value of the result.

Premium pricing

If your service is genuinely different and you can demonstrate that difference, premium pricing may be appropriate.

The important part is being able to communicate why the customer should pay more.

A premium price without a premium proposition is difficult to sustain.

Competitor pricing

Looking at what competitors charge can give us useful market information.

What it cannot tell us is whether their price makes sense for our business.

Their costs may be different. Their capacity may be different. Their customers, experience, positioning and profit expectations may also be different.

So use competitor prices as information, not as a substitute for knowing your own numbers.

Break-even pricing

There may be times when your objective is simply to recover costs.

For example, you may be trying to establish a market presence or build an audience.

That can be a deliberate short-term decision, but it is not a sustainable long-term pricing model if the business never creates a surplus.

Other tools in your pricing toolkit

Discounting

Discounting does not automatically mean bad pricing.

If you have spare capacity and want to introduce more customers to the business, reducing a price may support that objective.

But the numbers still matter. A discount needs to be considered against your costs and the profit you are giving up.

Bundle pricing

You may also combine several services into one package.

If you understand the relative costs and profitability of each service, bundling can create additional value for the customer while still making financial sense for the business.

Anchor pricing

Anchor pricing brings psychology into the picture.

The customer sees one price first, which creates a reference point for the price that follows.

This is another reminder that pricing is not just numbers. Psychology and communication play their part too.

You need to understand your cost base, your capacity and your time availability. Without those, you are pricing largely blindly.

Use our free service pricing calculator

You do not have to do all the number crunching yourself.

Our free service pricing calculator lets you enter your costs, desired profit and available time to see what those numbers mean for your pricing rates.

You can change the assumptions and run different scenarios. If you work fewer weeks, change your available hours or aim for a different level of profit, you can see the effect on the rate you need to charge.

The calculator gives you a floor based on your costs and another rate that takes your target profit into account.

You can also use our profit and discount calculator, pricing and discounting calculator and break-even calculator to test other pricing and profit decisions.

FAQs

How do I calculate pricing rates for my services?

Start with your business costs, add the profit you want to make and divide that by your realistic billable capacity. Use the result as a financial reference point, then consider your customers, market, proposition and business objectives.

Should I include paying myself when calculating my rate?

Yes. Your business needs to support you as well as paying its other costs. Leaving your own reward out can make the rate look more profitable than it really is.

Are all my working hours billable?

No. Marketing, administration, business development, customer support and other activities take time but may not be directly chargeable. Your rate needs to reflect the time you can realistically sell.

Do I need an hourly rate if I charge by project?

It is still useful to know one. Even if the customer sees a fixed project price, understanding the likely time and resources required helps you judge whether that quote works financially.

Should I use competitor prices to set my rates?

Competitor pricing gives you useful context, but it should not replace your own numbers. A competitor may have completely different costs, capacity, customers and objectives.

Is discounting always bad for profit?

No. Discounting can be useful when it supports a clear objective, such as filling spare capacity or introducing new customers to the business. The important thing is knowing the financial impact before reducing the price.

Episode Timecodes

• 00:28 - How much should you charge?
• 01:23 - Introducing the ONC pricing framework
• 02:16 - What your pricing says about your business
• 03:05 - Objectives and business purpose
• 06:00 - The numbers behind your pricing
• 09:31 - Time, capacity and billable hours
• 11:34 - Calculating a charge-out rate
• 12:00 - Using the free service pricing calculator
• 13:56 - Cost-based, value, premium and competitor pricing
• 16:33 - Discounting, bundle pricing and anchor pricing
• 18:55 - Bringing Objectives, Numbers and Choice together
• 20:11 - Two practical actions to take after the episode

Related episodes

• What Is Profit? Gross Profit and Net Profit Explained
• How to Price Using Target Costing
• How to Price Your Products or Services

Key takeaway

Good pricing starts before you choose the final number.

Be clear about your objectives and what you want the business to achieve. Know your costs, decide what you want the business to make and understand how much time you can realistically sell. Then choose the pricing approach that fits your customers and your proposition.

The two practical actions from this episode are simple. Write down your business costs and think about how much you want the business to make.

Then ask whether the resulting price supports the business you are trying to build.

Plan it, Do it, Profit.

Further Support

If you want to work through your own pricing numbers, start with our free service pricing calculator. Add your costs, target profit and available time, then test how different assumptions affect the rate you need to charge.

If you need help with pricing, profit, costs or understanding the numbers behind your business, you can contact us for an initial chat.

You can also watch more practical finance and business support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

How much should I charge for my products and services? One of the more common questions that I've encountered in over 26 years running my business. Spoiler alert, the short answer is it depends. Hi folks. Welcome to episode 54 of I Hate Numbers, your weekly hit of business numbers and news to help you improve your money mindset, make profit, save time, and run the business that you desire.

This week's episode of I Hate Numbers is focusing on pricing. More particularly, answering that conundrum about how much you should charge your customers for what you provide to them. Now, your business may be making products, you may be a retailer. You may be providing a service to your end client. There is largely a common set of principles that we can take on board, to use to how we approach the pricing of those two.

You may be a business that actually does a combination. You may provide products, you may be a retailer, but you may also provide an aftercare service, or you may have an extension, or a pivot to your business. Now, we are going to set a framework in this episode, and I'm going to call it ONC. That's a three-tip framework here that's going to help us set the right prices for our customers.

I will point out at this juncture that there is no such thing as one price point, one pricing approach, and it really depends on a number of variables as to decide what we charge a particular customer or group of customers. The focus when we apply this will be on services. There's lots of takeaways for product businesses, but in a future podcast episode of I Hate Numbers, I'm going to be focusing particularly on pricing when it comes to manufacturers themselves.

So, let's crack on with the show. Now, before we dive deeper and look to see what we need to do as far as pricing is concerned, let's think about our purpose. Now, pricing represents to the outside world a message about what your business represents, about the brand that you are developing, and the brand that you're building.

It sends a message and the short answer is the price that you charge your customers for either your services or your products, is between what's called the ceiling and the floor. The ceiling represents the maximum price that your client, your customer, is willing to pay based on what you provide to them, more of that later on, and the floor is the bare minimum you should be considering to charge for your services.

That said, we are going to be talking products as well, but the focus is when it comes to the application, we'll be on services, but there's a commonality of principles that we can apply to any approach. Now, the first thing is in this ONC, is you need to think about your purpose, your objectives in your business.

Typically, when we choose a pricing approach, we typically use that to support, reinforce, and achieve our end purpose, our end goals, our business objectives, our marketing objectives, if you want to use more common language there. Pricing is not just a numeric calculation, even though numbers are heavily involved in the decision process.

It's a combination of psychology. It's a combination of achieving end objectives. It's a combination of number work that goes into it. It's a question of communication of that price. So, it's a whole blend of things, and it takes businesses many years to try and come up with the right approach. Businesses are always iterating, changing, and modifying their pricing approaches, but they still fall back on basic principles.

So, the start point for me is you need to think clearly at the beginning. What is the purpose? What is the objective that you are trying to achieve? Now, let me show you an example here. If one of your objectives is perhaps for building up your customer base, for building up of your audience, making your services more accessible to a wider populous,

then that might move you toward choosing a pricing objective that gives that. So, it may not necessarily be the highest price you could potentially charge, because the higher the prices will mean the smaller numbers of clients that will engage with you, and if you want to build up audience numbers, and it could be some good reason you can cross-sell to them.

They can actually look at other things in your business that you might be wishing to sell to them. You may be in the social enterprise sector and, therefore, you want to have a wider reach in terms of the people you help and support. And therefore, your pricing objective is going to be there to support that.

If you are there to actually support a particular lifestyle business, then it may be that in terms of the time capacity that you might have, in terms of the hours that you wish to work, in terms of the limits that you put on yourself or your business, you don't necessarily want to conquer the world, then you might choose a slightly different pricing point.

So, think clearly about your purpose, the messages you wish to convey to your customers, your clients, what objective you wish to do, and this is all going to be underpinned by, one of my favorite things in business, which I always encourage all business owners to do, is to plan. Then, we're not talking about formulating a plan as a document, but that planning, thinking ahead, where you wish to end up in your business over the next, say, 12 months, two years, and beyond. Having thought clearly about what objectives you're trying to achieve, we then need to think about numbers, and numbers

you cannot price, in my opinion, without actually understanding numbers, and there's a variety of numbers that you need to connect with and understand fully if you're going to be choosing the right pricing approach. I will point out, folks, at this stage, if you're thinking Mahmood, this is going to be lots of numbers that we've got to play with.

It's going to be a heavy amount of mass. I'm not comfortable with numbers at the best of times, fear not. At the end of the show notes, I'll show you a link and we've got some wonderful pricing calculators that we're sharing with you that actually takes the heavy lifting out of you coming up with some figures to look at. Now, what are the key numbers that you need to understand in your business in order to come up with the right price?

And I'm using that term right price in a very loose sense of the word. First thing, you need to understand and identify what your costs actually are. So, what are the costs to you of running your business, of providing that service to your customers, of the infrastructure costs? So, you need to sit down and actually figure out what your costs are.

So, what I would recommend at the end of this podcast, if not during it, grab a sheet of paper and just scribble down what are the running costs in your business. For those of you who are relatively new to the podcast, if you check out previous podcasts, then there are episodes on costs. We talked previously about fixed and variable.

We've talked about the different samples, but let's give a reminder here. Sit down and write down a list of what the costs are that you encounter in your business. So, typically things like infrastructure costs, like website hosting, costs of marketing, costs of rent, cost of employing freelancers, cost to yourself.

Remember, you need to factor in paying yourself a wage out of your business. If you don't, your business will not be sustainable. Think about any utility costs that you might have, storage costs, and so it goes on. So, make a list and then put numbers by them. I would typically look ahead to think what your cost base might be for the next, say, 6 months to 12 months.

The objective will be, when you price, is that the customer is the one who's going to be paying you back for the costs that you've incurred. Also, think in terms of what's your own aspirations. Do you have an idea of how much profit you wish to make in your business? Now, the pricing that you choose will reflect recouping

those costs from your customers. So, customers pay you effectively for running the business, and they will pay you a premium above your costs. Now, how much that profit level actually is? That's for you to decide of the type of audience, the type of business, the type of proposition, but you need to factor in, I would suggest, a profit margin, a profit markup, something to add onto the cost.

Some people, if you're a new start business, you may see it as an equivalent, what you need to support your lifestyle. What you might do is to have it as a figure approximate to your previous salary. Again, if you are a startup, if you've left a reasonably well-paid job, it's going to be difficult, not impossible, to actually match that salary in the short term if you are a new startup business.

But set a level, and again, if you check out our pricing calculator link provided in the show notes, then the numbers that you need to type in are there and it's structured in such a way that it's going to be relatively easy to import. More of that at the end of the podcast. So, think about your costs. Think about profit margins.

How much profit do you wish to make? What's the figure above that? What's a sensible reward for you? You also need to think about other things. And other things are what is your own personal time availability, time capacity. Now, if you're a solepreneur, if you're a business that's heavily involved, how much time, if you are in services, do you actually have to deliver that service to your end customer?

If you're running a consulting business, if you're running a training business, if you're running any sort of advisory business, any services that you provide, what's your time availability and your time capacity? Now, that sounds very grandiose, and what we mean by that is in a typical working week, if we take it to seven days, there's 168 hours, it's going to be pretty impossible to work 168 hours, and your lifestyle, your circumstances, and your aspirations where you are in your business cycle

would mean that you may only have capacity for maybe 40 hours. Now, the second thing you've got to bear in mind is that might be the hours that you've got available to devote to your business, to delivering your services, to supporting and serving your clients, but that doesn't mean you are spending all that time in delivering those services and being able to charge that time.

All businesses will have a dimension of what's called infrastructure. Time that's being spent in terms of supporting the business, doing the administration, marketing, reaching out, developing new services, and that time you need to consider there as well. Now, if we take as an example, somebody who might have 40 hours available in a given week, it may be that they look at what they've got to spend time on in terms of administering, reaching out, marketing, support,

infrastructure, developing new services. They may be spending 10 hours a week on average in terms of their social media feed, the marketing, the admin, et cetera, et cetera. That means that's 30 hours you have available. The next variable I would consider, certainly in the context of services, is how many weeks of that year are you available to work?

If we can factor all those numbers together, take into account our costs that we've got to incur, the profit we wish to make on top, and the time available over a given 52-week period, we can develop a charge-out rate, and two numbers we can come up with. One will give us an idea of costs, what we need to charge to recoup our costs, and number two, what we need to charge to make a level of profit.

Now, folks, I'm going to go back to the calculator here. If you check out our free online calculator for working out rates on services, it enables you to do a number of what if scenarios. So, you could, for example, put in your cost, put in your desired level of profits, use the slider to configure how much time you have available, and it'll give you an hourly rate on those two variables.

If you decide compared to the marketplace, compared to what competitors are doing that that pricing point is too low, and you've got a proposition which delivers value to the customer, then you can change the target profit. If you find out that your charge-out rate is too high compared to what your proposition is, what customers are willing to pay, then you can use that as an incentive to challenge your costs.

So there's a number of variables that you can play around with to actually focus your mind clearly. Now, even though you might be looking at hourly rate, not all businesses are able to charge by the hour, and you may be looking to take on a piece of work from somebody and charge by the project, charge by the completion of that assignment, of that task.

In the back of your mind, you'll need to have some idea about time taken, so when you come up with a quote, the hourly rate will be embedded there. So, let's remind ourselves what we've talked about so far. We've talked about purpose, marketing objectives, and within those objectives you'll find you're going to be accessing a variety of pricing options and strategies. Knowing your numbers, and it's critical

whatever pricing strategies you adopt, your ultimate objective has got to be to build and develop and gain long-term sustainable profits. The price you charge your customer certainly sets out a message. From a business perspective, you are interested in the profitability that you generate. If you dismiss profits and you think that's not part of the equation, then you are not going to have a business on your hands.

Now, the third thing is choice. How do you know the actual pricing to choose? Now, typically pricing comes down to three big choices within which there are a number of variants to choose. So, you can either choose what's called a cost-based approach, which says, if I know what the costs are of providing my services to an end client, I'm going to take that, and I'm going to add a proportion to that.

It's what's called a markup, a cost-based approach. That's perfectly fine. The upside is it's easy to apply, easy to adopt, easy to understand. The downside is that it's not market led. You're not going to be challenging and keeping an eye on your cost to make them more efficient. You may end up being very uncompetitive in the marketplace.

It may not suit your customers either, but it's there. Now, market-based pricing, so things like value-based pricing is based on the transformation that you'll provide to your client. What is the solution you are looking to provide? What is the pain that you're trying to alleviate with your client, and therefore you can base that on the value and that transformation that you give.

You can also look at things like premium pricing. So, if you provide a service, which is very unique, and you are sure, based on research, based on evaluation, that it's very unique what you offer, then you offer a premium beyond what competitors may be charging. Some people may be going by what's called competitor pricing, and they literally see in their sector, in their field, in their arena what others are charging, and pitch their prices at the same.

If you do it that way, it's easy, it's comparable. You still need to understand your cost base there, but you may find unless you can communicate clearly to the customer what your differential is, why you are different, then it's going to be very difficult to compete on that basis. The third option is literally break even.

So again, you may have an objective just to establish a market presence, to build up an audience base, and therefore, what you're looking to do is just to recoup your costs and not make any surplus on top of that. That for me, is a bare minimum figure, and obviously that is not sustainable. Now, within the

pricing toolkit, I'm just going to mention two or three other variants that we have, but to apply these, you still got to come back to what is your objective? What is your purpose? What are you trying to achieve in your business? Number two, you need to have a command of the numbers. You need to understand your cost base.

You need to understand the capacity. You need to understand your time availability, and if you don't have access to those, then you are pricing largely blindly, and that road leads to ruination. One approach used by many service businesses is to what's called discounting. Now, discounting as a term can have a very negative effect, a very negative interpretation, but discounting, if viewed correctly,

and discounting may not be the word you necessarily want to communicate to the customer is a valuable tool in the toolkit. So, for example, discount pricing may be very popular and a good tactic to use if you have lots of time on your hands. So, you've got a 40 hour week available, you don't have much demand, you don't have many people coming to you.

So, therefore, what that means is you can afford, I'll use that word loosely, to reduce your base price, to discount that because you'll be gaining more customers, you'll be gaining more access. Obviously, you might want to dress that up to clients as in terms of circumstances being such, you want them to get to know you better, introduce yourself to your own client.

So, reducing your prices, your discounting, as long as it's not below the cost price, can be a good thing to do. When we look at product pricing in a future episode, we are going to be looking at discount pricing that's used quite actively in terms of manufacturers and retailers here, and they use that to good effect,

and the level of discounts that they offer, they still need to reference it back to what their cost and profit base is. Bundle pricing. So, you may have a combination of services that you are offering to your clients. If you know what the relative margins are, the relative profitability, just like a supermarket would do, you could probably bundle them up.

So, if somebody buys service X at a certain price, you also allow them access to service Y. The additional cost typically of providing those additional services are what they call marginal. You have something called anchor pricing. Now, this is where the psychology comes in, as well as the knowledge of numbers and your objectives.

Now, an anchor price is where you communicate a front headline price. We've seen that probably when we're buying cars. Apple have done that to very good effect, and they'll publish a headline price, and then, they will cross that out, but that's the first price the customer gets to see, and then they reduce the price accordingly.

That's called anchor pricing. That's using psychology, knowing your numbers and what your objectives are. Okay, folks, so I'm just going to wrap up here. Let's remind ourselves of three things that we need to have in our toolkits. So, we need to be aware of what our objectives are, our purpose behind our business, what we want to achieve.

Pricing will help us get to that stage. We need to know our numbers clearly. We need to have a good grip on them, and as we've talked about on previous podcasts, you need to be able to catch those numbers. So, I'll give you a link in the show notes. Cloud, at the risk of boring everyone, is number one.

You've got to do that irrespective of the size of your business and then select the appropriate things in your toolkit. And as another example, if you are trying to illustrate that you are a very good high-quality service business, then the pricing point has got to match that offer as everything else does in that business.

If you're looking for audience gaining, you're looking for volume, you want to actually deliver those services to a wider base, for a number of good reasons, then it may be you go for a lower price point. As we see in airlines at the premium end to the Ryan Airs and the Easy Jets of this world, they're both using pricing slightly different, but they've got slightly different propositions to achieve.

Folks, I hope you've got some value out this particular podcast. Give me your feedback. Check the show notes out for that free online calculator, and there's two takeaways from today's episode. Make a note of the cost that you've got, jot them down, and think about how much you want to make in your business.

Does that fit then your objectives and your purpose? Check out our online calculators that will take the heavy number crunching away from you. Subscribe to the podcast and I'll see you guys next week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value.

If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.