Setting your prices as a service business

The calculation

Four steps, and the third is where it usually goes wrong.

1. What you need per month to live on. After tax, including whatever you want to put aside.
2. Your costs as a business on top of that. Income Tax and National Insurance (Class 2 and Class 4 if you're self-employed), insurance, a pension, your phone, your software, your vehicle, your accountant. Those come off your turnover first.
3. Your billable hours. A forty-hour week rarely produces forty billable hours: winning work, writing quotes, admin, training and holiday all come off. Twenty to twenty-five is more realistic for many service businesses.
4. Divide what you need by those hours. That's your floor. Not your price — your floor.

If that figure alarms you, you've learned something useful before you sent a quote. It usually doesn't mean you're too expensive; it means you were counting too many hours.

The VAT threshold, and the twenty per cent cliff

This is the pricing decision no spreadsheet warns you about. You have to register for VAT once your taxable turnover passes £90,000 over any rolling twelve months. Under that, registering is your choice.

The day you register, nothing about your work changes and your price to a private customer goes up by twenty per cent — or your own income goes down by a sixth, if you absorb it. Neither is comfortable, and both arrive at a moment when you're busy.

Two things make it manageable. Know how close you are, because the test is a rolling twelve months and not your financial year; a good quarter in November can take you over without you noticing. And know who your customers are: if you sell mainly to VAT-registered businesses, registering costs them nothing at all, because they reclaim it — and you start reclaiming the VAT on your own costs. If you sell mainly to households, it's a real price rise and you want it planned rather than sprung on you.

What you don't do is turn work away to stay under. That's a decision about a tax threshold dressed up as a decision about your business.

Day rate or project price

A day or hourly rate is fair and easy to explain, and it has one problem: it rewards working slowly. Get better and you earn less for the same result.

A project price solves that and moves the risk to you. If it overruns, that's your bill. It works well for work you know and badly for work whose size is still unclear.

A practical middle: a project price with a clear line around what's included, and an hourly rate for everything outside it. Put that line in the quote, not in a later conversation — it's exactly the kind of agreement that otherwise gets reopened after the fact.

What to say when someone says you're expensive

"That's expensive" is rarely the end of a conversation. It's almost always a question in disguise: *why does this cost so much?*

The worst answer is to drop your price straight away. You've then confirmed that it was negotiable, and the next quote starts lower. The second worst is to defend it with your costs — those are your problem, not theirs.

What does work is asking back: *"Compared with what?"* Sometimes it turns out they're comparing a quote with half the work missing. Sometimes their budget really is lower, and then you can look at whether there's a smaller job that fits. And sometimes they say it because that's what you say.

Make it smaller rather than cheaper

If the budget genuinely doesn't fit, reduce the scope rather than the rate. Take something out of the job instead of discounting all of it.

That isn't a trick, it's a real difference. A discount says your price was too high. A smaller job says your price is right and there's less work being done — and on the next enquiry you're back at your own rate.

When to put your prices up

Two signals. You say yes too often because you're busy enough and still not left with anything. Or you win almost every quote — in which case you're probably under.

Do it with new customers first, and with existing ones by giving plenty of notice. Record your rates per customer in your system, so you can see later who's still on the old figure. That's exactly the kind of thing you won't remember in two years' time.