How to Price Your Services
The trouble with setting pricing for new businesses or services
Pricing is always hard, but it’s especially tricky when you're just starting out. How can you come up with a price if you don’t even know how long it will take or what the market rate is for that service? I guarantee you won't get it right the first time because NO ONE does! My strategy is about making incremental changes in the right direction. So here goes!
Step 1: Start with an educated guess
Carefully think through your project. How long do I think it will take - 5 hours? 10 hours? Add in some extra time if you know you're a terrible estimator (like me!), then multiply by your desired hourly rate. Obviously, this method isn’t based on any sort of actual data, so it’s not a great way to start. But it is a start.
A better method would be to do a test run of your service. Say you’ll be providing CRM setup for small businesses. Create a fake brand (or use an existing one), make an account, and build all the necessary processes on the platform. Take detailed notes on how long it took. Now you have a decent baseline!
You should also do some market research. Get on the internet and seek out people who offer the same service. What does their pricing look like? Is it close to yours or light years away? You may rethink your price based on your findings.
DISCLAIMER: Obviously there are massive flaws to the strategy of referencing or copying other people's pricing. You have no way of knowing whether they're making a profit or if people are even buying at that price. We don’t want to copy someone else’s pricing, but we can certainly take note and use it as reference for building our own pricing models.
Review the information you've gathered so far to come up with a price that feels comfortable but fair. Don’t worry too much about charging too much or too little at this point. Just go with your gut! We’ll refine this price later, but we do need a starting point.
Step 2: Sign a client at that price
This is your opportunity for a PAID test run of your service. Do the work, keep detailed time logs, and note any tips or tricks that will help you serve your next client even better. Don’t forget to ask for a review to build social proof!
Step 3: Do a post-mortem evaluation and raise your rate
Now you have a case study of how long the project actually took. This is exciting: your first piece of REAL, personalized data! Go back to your original time estimate and see how far off you were. Did you underestimate? The vast majority of us do. Update your package price based on the actual hours:
(# hours) * (hourly rate) = (package price)
Important: if you overestimated your time, DO NOT decrease your price. Remember, you made a sale at that price, which confirms market acceptance.
Now, get another client at your new higher rate and repeat the process. Continue to monitor your hours for future projects so you have more data to confirm your average hours.
Step 4: Move towards value-based pricing
Long term, it doesn’t make sense to price your services based on the number of hours it took to complete. Think about it. As you provide the service more frequently, you’ll gain experience, become more familiar, work more quickly, and provide a better service. Yet, in our previous formula, working more quickly equates with a lower price. But does a quicker turnaround time equate to a lower value to the customer? Of course not! On the contrary, won’t the client be delighted if you can complete their service in 2 days instead of 2 weeks?
This is VALUE-based pricing - when we stop pricing based on what it cost us to perform a service and start pricing based on the value of the service itself. Look back at at our formula from the previous step:
(# hours) * (hourly rate) = (package price)
It’s not so much a formula for how we should PRICE our services, but how we should recognize our LABOR COST. This formula tells us the minimum price we want to charge for a service, but as we gain experience and better understand our clients and our market, we should raise that price to better align with the value provided to the client.
Once you've been through this process with several clients, you'll get a good feel for whether your current pricing is working for you or not. Use you judgement to increase as needed. Also look out for obvious clues that you're charging too little, like if clients are commenting how cheap you are, or if they aren’t respecting your time or talents.
Pricing is an art, not a science, and there’s a lot I didn’t cover here. But this is the basic structure I’ve developed over the last 3 years in business. The more quickly you can move from formulaic hourly based pricing into value-based pricing, the more profitable you’ll be.
I hope this quick guide provides some useful tips on how to get started. If you’re further along in your journey and have any advice of your own, I’d love to you to share in the comments!