When you provide a service with minimal cost other than time, it can sometimes be difficult to know what you should be charging. That’s why service pricing is different to product pricing.
There are three main pricing methods: cost-plus pricing, market rate pricing and value-based pricing.
1. Cost-plus pricing
This method is based on what you would pay an employee. It’s traditional to multiply the notional salary cost by a factor of around three. This would cover the salary, plus a contribution towards overheads, plus an element of profit for the business owner who is taking the commercial risk.
For instance, if the employee is paid £10 per hour this would be closer to £13 with national insurance and pension. If the job takes four hours, then you would charge £13 x 4 x 3 = £156. Of this, £52 would pay the employee and their costs, £52 would be a contribution towards overheads and £52 is the profit. So your rate is £156 for the job.
2. Market rate pricing
This approach depends on you knowing not just the range of market rates in your geographical area and industry, but also where you sit amongst your competitors. Do you provide a better service than them AND are you perceived to provide a better service?
3. Value-based pricing
This calculation relies on knowing how much value you'll add to your client. Preparing a set of accounts may sometimes be seen as relatively low value, as many others could offer that same service, which may itself be perceived as just fulfilling the requirements of HMRC. But if your accountant spots a large or small tax saving opportunity, the value of the work varies even though it’s essentially the same work. It could then be very valuable.
The other thing to consider is how much you need to earn as a minimum and how much you want to earn, as well as how many hours you want to work each week/year.
Pricing formula for services
You can calculate your minimum hourly rate using the formula below. You should never accept work below this rate, unless the job provides other benefits that could make it worthwhile.
Hourly rate calculation
Profit after tax + tax + overheads = total turnover.
Hours working in the business after allowing for holidays and time spent on business admin, marketing, etc. = chargeable hours.
Total turnover/total chargeable hours = hourly rate.
You can also use this method to work out your ideal rate and compare it with others in the marketplace to see if it’s realistically achievable or whether you need to reconsider your business plan.
This calculation is also useful if you’re thinking about investing in automation or outsourcing. It helps you put a price on the time you will save, which you can then compare with the price of automation and outsourcing.