How to Price Services Correctly: For Owners Who Always Feel They Charge Too Little
90% of service business owners price too low. Not because they lack value - because they price by cost, not by value. Here's a method that changes that.
By Ligal Frish
If you're self-employed or run a service business, you've probably priced by the hour, compared to competitors, and still felt you weren't earning enough. This article is for you.
Correct service pricing rests on three principles: understand how much the value you deliver is worth to the customer (not how much it costs you to produce), price by outcome not by time, and build a price ladder that lets the customer choose.
Why most service business owners price too low
Reason number one: they calculate how many hours they put in and multiply by an amount that feels fair to them. That's cost-based pricing, not value-based. The problem is the customer doesn't buy hours. They buy outcomes.
Example: an attorney who saves a client a bad contract worth $200,000 - should they charge by hours worked (6 hours × $250 = $1,500) or by the value created?
The Value-Based Pricing method in steps
Ask the customer: 'What is this problem costing you now?' - money, time, stress, inconvenience.
Calculate: how much is the solution worth to them after implementation - additional profit, savings, peace of mind.
Price between 10% and 30% of the value you create.
Don't be afraid to state a high price - whoever buys on value won't negotiate on price.
Building a price ladder
Offer three options - not one. Two is a dichotomy (yes/no). Three is a choice. Research shows the middle option gets picked most often.
Example: Basic $890 / Standard $1,790 / Premium $3,290. If everyone picks Basic, prices are too low. If most pick Premium, raise everything.
How much to charge per hour - and how to think your way out of it
Think about how many hours you actually work (not 8/day - probably 4-5 billable hours). Divide desired income by those hours. You'll likely find you need to charge $150-$400/hour.
But - the more value you create and the less you tie to hours, the more you'll earn and the less you'll work.
The price test
Before finalizing a price - ask yourself: 'If the customer said yes immediately without negotiating, would the price be too high?' If the answer is no, the price is probably too low.
What Plan B Business does here
In our engagement we review the entire price ladder, build a value-based pricing model, and practice the price conversation - because even if you have the right price, you need to know how to state it with confidence.