How to Price a Service Correctly.
Most service businesses price by guessing what competitors charge and going slightly lower. That's not a pricing model.
The price a business charges for a service is one of the most consequential decisions it makes — and most businesses don't actually make it. They inherit a number from somewhere, adjust it slightly over time, and call that a pricing strategy.
The result is predictable: a business that is busy but not profitable, because the price was never calculated from what the service actually costs to deliver, what the owner needs to earn, and what margin needs to be left over to keep the business viable.
What does correct pricing actually cover?
A price that works clears three separate bars, in order:
1. Cost of delivery
The direct cost of producing the service — materials, products, time, and any variable costs that exist only because the service was delivered. If your price doesn't clear this, you're paying to go to work.
2. Owner salary
Not owner draws. Not whatever's left. A real salary — what you would pay someone else to do what you do. If the business can't pay you a market salary, it isn't a viable business yet. It's a job you've created for yourself with additional paperwork.
3. Reinvestment capital
Money left over after costs and salary — to replace equipment, train staff, handle slow periods, or invest in growth. Without this, the business is always one unexpected cost away from a cash crisis.
“Most businesses price to cover costs. The ones that compound price to cover costs, pay properly, and leave margin to reinvest.”
Why competitor pricing is a trap
Looking at what competitors charge seems logical. It tells you what the market will bear. The problem is that you don't know your competitor's cost structure, their margins, their overheads, or whether their business is actually profitable. You're benchmarking against a number that might be wrong for them and is almost certainly wrong for you.
More importantly, competitor pricing anchors you in a race you shouldn't be running. If your pricing strategy is to be slightly cheaper than everyone else, your competitive advantage is price — and price is the easiest thing to beat. Someone will always go lower.
How to build a price from the ground up
Start with your cost floor. Calculate what it costs in direct terms to deliver each service or job — materials, time at a loaded rate (including super, workcover, and any on-costs), and any direct overhead that applies. This is the minimum viable price.
Add your overhead allocation. Fixed costs — rent, insurance, software, admin — need to be spread across your billable capacity. Divide total annual overheads by the number of billable hours or jobs you can realistically deliver in a year. Add that to each service.
Add your salary. What you need to earn, expressed as a cost per service. Then add a margin percentage on top — enough to cover the business building capital you need to stay viable and growing.
The number you arrive at is your floor price. It's the minimum you can charge and still run a sustainable business. The question then becomes whether the market will pay it — and if not, whether the cost structure can be adjusted to make it work, or whether the offer needs to be repositioned to justify the price.
“The market will often pay more than you think. The fear of losing a client to a competitor is frequently overestimated — and the cost of undercharging is always underestimated.”
When to raise prices
If you haven't reviewed pricing in the last twelve months, you've effectively cut your margin — costs go up annually whether your prices do or not. If your business is at capacity and you're turning away work, you're underpriced. If you're consistently the cheapest option without a specific strategic reason to be, you're subsidising clients who would pay more.
The goal isn't to charge as much as possible. It's to charge enough that the business is sustainable, the work is worth doing, and the margin exists to invest in getting better. That's the price that makes everything else possible.
Foundations first
Pricing is the first thing we look at
The 4-Week Jumpstart includes a full pricing review — calculating the cost floor, overhead allocation, owner salary, and margin — and produces a pricing model you can actually defend and work from.