How to Set Service Pricing

You might have an idea of what a physical product, like a T-shirt or a mug, should cost. But what about an hour of career coaching? Planning a wedding? Or face painting at a kid's birthday party? For freelancers, consultants, and owners of service-based businesses, setting prices is an essential business decision. Your rates will influence who’s willing to pay for your services and how much revenue you’ll be able to bring in. This shapes how sustainable and viable your services business will be in the long term. 

In this guide, we dive into common pricing strategies, tips for how to set service pricing that matches your business type, and common mistakes to avoid.

Understanding service pricing

Unlike pricing physical products, which come with tangible production costs (like manufacturing and shipping expenses), the process of pricing services often involves more intangible and subjective factors. This includes determining the value of your time, expertise, and how much your customers perceive your offerings to be worth. 

You’ll typically need to layer in several factors into your rates, including business expenses and overhead costs, local operating costs, expertise, unique selling proposition, industry standards, customer expectations, perceived value, and profitability. 

The basics: How to determine service rates

Ready to put actual numbers down? Here are some best practices for how to set your service pricing.

1. Calculate your annual business costs

First, tally up all of the costs associated with running your business for the year. Examples of common expenses include:

• Rent

• Labor (such as hiring freelancers or seasonal help)

• Materials

• Tools and equipment

• Office supplies

• Software

• Subscriptions

• Internet

• Phone

• Utilities

• Taxes (local and federal)

• Insurance

• Licensing fees

• Continuing education

2. Establish income and revenue goals

Then, assess your cost of living and recurring expenses. Use this as one factor to help determine your target annual income and how much to charge for your services. Remember, to build a sustainable business as a freelancer, consultant, or solopreneur, you’ll need to be able to cover not only your business costs but your personal costs, too. 

To translate your target annual income into a suitable service rate, consider these guiding questions:

• Income goals: How much money do you need to bring in to  build a sustainable business and comfortably cover your costs of living? (This includes your living costs, such as rent, mortgage, health insurance, taxes, food, clothing, utilities, phone, internet, transportation, childcare, entertainment, travel, and any other expenditures).

• Billable hours: How many billable hours (time you can bill to clients) and non-billable hours (such as general admin, planning, and marketing tasks) are you aiming to work?
  Calculating an hourly rate can help you determine a baseline—even if you ultimately opt for a different pricing model. To calculate a baseline hourly rate, follow this formula:

Hourly rate = (business expenses + target salary) ÷ billable hours

Add your total annual business expenses and desired annual salary together. Divide this number by your annual billable hours.

3. Factor in expertise and experience

Now, consider how your particular expertise and experience factor in, including:

• Specialized skills

• Certifications

• Training and education

• Years and depth of experience

• Industry reputation

• Awards and honors

• Reviews and testimonials

• Results you’ve delivered

When setting your service rates, factor in how these elements set your services apart—and how much your target customers are willing to pay for this expertise. 

4. Deepen your understanding of the overall market

Analyzing your competitors’ pricing methods, customer feedback, broader market trends can help you better gauge demand and uncover opportunities, as well as understand how much your target audience might be willing to pay for your services.

Analyze your competitors’ pricing 

Research comparable local and online businesses with similar target audiences. Compare the nuances of their services and prices, including their pricing models, typical price ranges, and if or when they offer deals, discounts, trials, or other price-related incentives. 

Conduct market research

Review relevant research, reports, publications, and data to assess industry-standard pricing and benchmarks. Many trade groups offer resources designed to help you understand typical rates and determine your own prices, such as the Editorial Freelancers Association’s rate chart for freelance writers and editors or TheCut’s service calculator for barbers.

5. Select a pricing model

In the next section, we describe a few common pricing strategies. Take a look and see which one(s) feel like the best match for your business.

Common service pricing strategies

Services businesses span a wide range of operations—such as freelancing, consulting, coaching, personal training, tutoring, designing, bookkeeping, and much more—so it follows that there’s also a wide variety of pricing strategies. Here are a few common service business pricing strategies to consider.

Cost-plus pricing

Cost-plus pricing involves calculating what it costs to deliver your service and adding a markup (profit margin). This is a common approach for pricing products.

To determine what it costs to deliver your services, add up all of your business expenses. 

Then, determine how many sessions, projects, or packages you’d ideally book in a year (or another relevant time span). To calculate how much it costs to provide each session, divide your total annual business expenses by the total annual number of sessions. 

Plug the above totals into this basic formula for cost-plus pricing to determine a cost-plus price: 

Selling Price = Cost Per Session + Markup

Benefits

Cost-plus pricing can be helpful for calculating your baseline costs and minimum viable rate. Since it’s based on measurable factors, it can feel like an attainable starting point when you’re first starting to figure out pricing.

Limitations

Since service pricing centers around costs, it doesn’t account for other factors, like demand, perceived value, or market forces (like inflation or tariffs). Calculating a baseline cost can help you when determining hourly rates, project rates, value-based rates, and retainer prices, but cost and a markup don’t always make sense as the sole factors to base your pricing on. For instance, it might not make sense for service providers whose work is tied to time in industries where hourly pricing is the norm (such as tutoring sessions or therapy appointments) or for services that provide value which far exceeds tangible operating costs (consider value-based pricing).

Hourly pricing

When charging hourly rates, you’ll bill based on the actual time that you work. This could include the core service you’ve been hired for (such as bookkeeping, web design, or event photography), as well as any associated hours, such as time for prep or travel time.

Benefits

This intuitive and easy-to-grasp model is the standard in many industries. For example, therapists, tutors, massage therapists, pet sitters, personal trainers, and other professionals whose services are tied to dedicated blocks of time, like classes or appointment slots, typically use hourly pricing.

Limitations

For creative or project-based work, it may be tricky to accurately estimate how many hours a project will take. You’lll need to have a plan for what to do if you’re nearing the budget cap or maximum hours.

Though hourly pricing can be a natural starting place, it's possible to outgrow this model. For instance, say you’re a freelance copyeditor or graphic designer. As you get better versed in your client’s in-house style guide or design preferences, you may be able to complete assignments faster. That means as you get faster at the job, you’ll have fewer billable hours—so, you’ll get paid less over time. If that’s the case, it may be time to consider one of the following models.

Project-based pricing

With project-based pricing, you’ll charge one flat rate for an assignment. If you’re weighing hourly vs. project pricing, know that these two models have a lot of overlap. If you're working in creative services, for instance, you could multiply the expected number of hours it’ll take to complete by your hourly rate to estimate a base rate.

Benefits

This pricing model is best for clearly defined, one-off projects, such as a fixed rate for cleaning a one-bedroom apartment, an engagement photoshoot, or emceeing a corporate event. It’s straightforward and standard in many sectors, and having a flat fee can give clients budgeting peace of mind. It can work well for freelance writers, and event planners, among others.

Limitations 

Beware of scope creep. Be sure to set clearly defined boundaries to protect your time and profits, and have a policy in place for projects that start to balloon beyond the initial agreement. 

Value-based pricing

Instead of purely basing on costs or hours worked, with a value-based pricing model, you’ll align your rates with specific outcomes (such as a measurable outcome) and/or perceived value (how much customers believe the service is worth). This perception could stem from how your service benefits your clients, such as solving meaningful problems, saving time, or offering a high-quality experience and service, an enticing atmosphere, or delightful features. Other factors could include the value of your specialized qualifications, skills, or certifications. 

There are a variety of ways to set a value-based price—and all of them will require conducting thorough research to gain a deep understanding of market demand and the value of what differentiates your offering, as well as your customers and their willingness to pay. Look for value signals in client reviews and feedback, customer interviews, usage, and market trends.
A few approaches include:

• Adding a value-based markup: Calculate your breakeven price. Then, add on a profit margin that’s based on the value you bring to a particular customer segment.

• Determining differentiation: Pinpoint your unique advantage and what sets your service apart. Research what your target customers consider to be the next best option. Now, for the extra-tricky part: Quantify the difference between that offering and yours. 

• Charging based on performance: Instead of charging based on your input (such as the hours you spent on the project), set a rate that’s based on the performance of a specific metric (like a percentage of the revenue that your work made possible).

• Offer tiered packages: Create tiers with different service levels. That way, customers can pick the option that feels like a good value for their needs.

This pricing model could work for businesses offering high-impact services with measurable outcomes (such as SEO consultants) or a specialty that’s in high demand (like wedding photographers).

Benefits

Through the process of formulating value-based prices, you have the chance to gain a deeper understanding of the current market and your customers’ needs and wants, which also strengthens your position to make informed business decisions overall. Since value-based pricing isn’t limited to your hours worked or operating costs, this model leaves more room for growth and experimentation.

Limitations

Value-based pricing can be challenging to set, since it’s tricky to assign a dollar amount to perceived value and to explain that value to customers. Rolling out and marketing this type of pricing model requires research and a sensitive touch. 

Retainer pricing

A retainer is a monthly service agreement, typically involving either a recurring amount of work (a pay-for-work retainer) or an agreed-upon level of access for professional advice (a pay-for-access retainer), priced at a fixed rate. You’ll work with your client to define the monthly slate of deliverables, outcomes, and access that you’ll provide them each month.

Benefits

Retainers can be beneficial for deepening your relationships with your ideal clients and building customer loyalty. The built-in consistency means you’ll have reliable revenue and predictable cash flow and a steady cadence of work. This model can work well for legal services, consultants, and landscapers, among others.

Limitations

Retainers work best for ongoing, long-term work—not one-off projects or gigs. So, this model might not be applicable to all business types. If you start relying heavily on a small number of clients, this can cause cash flow issues when a retainer ends. 

When to adjust and optimize your pricing

Pricing isn’t a static, one-time decision. The market is constantly shifting, so it’s important to regularly reevaluate your overhead costs, monitor profits, track your time and labor, and slowly raise rates, as needed.

Signs it's time to raise your rates

Wondering if it’s time to increase your service pricing? Here are signals it could be the time to make a change:

• You’re at full capacity and seeing consistent demand for your services. (Raising rates could make it possible to hire more help and take on more clients.)

• You see multiple competitors raising their rates.

• You’ve gained marketable expertise, such as new certifications, more training, or an advanced degree.

• You regularly hear customers say that your services are a bargain.

• You’re noticing the impact of rising business expenses (like higher material costs or rent) or economic forces (like inflation) on your profit margins.

Test and refine your service pricing

To refine your rates, take a look at your current business data and look for areas where you could test new prices. Assess your current conversion rate, evaluate profitability, analyze customer segments, and gather feedback from clients to inform any changes.

Remember, raising rates doesn’t necessarily have to mean an across-the-board increase. Here are other strategies to consider:

• Making discrete adjustments: Identify areas where you could test standalone pricing changes. For example, a hairdresser could keep standard haircut prices the same, but increase the cost of specialty services or bridal appointments.

• Creating service tiers: If you’re currently offering a single, fixed hourly or project rate, consider ways you could appeal to different customer segments by offering different service tiers, such as budget or premium levels or options geared toward individual customers, agencies, and enterprise clients.

• Packaging and bundling services: To increase average transaction value, consider offering packages, bundles, and add-on services.

Common pricing mistakes to avoid

When determining how to set service pricing for your operation, avoid these common missteps:

• Undercutting competitors’ prices: Undercutting your competitors’ price in an effort to win clients might feel like a smart move in the short-term, but in the long-run you could hobble your own business’ profits and viability. Plus, rates that are too low could signal to potential customers that your services are cut-rate or lower quality than your competitors’ offerings. Instead, compete on quality, service, value, and experience—elements that could bring in more revenue, not less.

• Copying other businesses' rates: Similarly, simply copy-and-pasting a competitor’s approach might not lead to long-term success either. Every business is different and you’ll need to find what works for the nuances of your specific operation. Your prices should respond to the specific context of your business, customers’ expectations, and the unique blend of talent, expertise, creativity, and care that you bring to your services.

• Neglecting to monitor business metrics: Be sure to go over your financial statements on a regular basis and track your current business expenses, costs, and profitability, rather than relying on past business data, since costs and profits will fluctuate in real-time.

• Charging solely based on time: Charging based only on the hours you’ve worked means your calendar and time-tracking tools will rule your work life, which could lead to burnout. Factoring the value and benefits customers will receive from your services can help you land on a price that better sustains your business and your life.

Final thoughts

Service pricing is a dynamic, ongoing practice—not a one-time decision. To make sure your service prices are continuing to support your business growth and client outcomes, be sure to track relevant metrics, revisit your rates regularly, and experiment and adjust, as needed.