How to Price Your Services Profitably as a New Business

Underpricing is one of the most common reasons new businesses struggle. Many owners set prices by looking at competitors or guessing what customers will pay, then discover there's nothing left after expenses and taxes.

Start with what you need to earn

Step 1: Decide your target owner pay

What do you need to earn personally for the year? Be realistic.

Step 2: Add your business overhead

Total annual fixed costs: insurance, software, vehicle, phone, marketing, licenses, bookkeeping, equipment and so on.

Step 3: Add taxes

Self-employment tax and income tax on your profit, plus Washington B&O tax, which is calculated on gross revenue.

Step 4: Add a profit margin

Profit is separate from your pay. It funds growth, equipment and a cash reserve.

Step 5: Divide by billable hours

You won't bill 40 hours a week, 52 weeks a year. Account for:

• Admin, quoting, travel and marketing time
• Vacation, sick days and holidays
• Slow seasons

Many solo service providers bill only 50% to 70% of their working hours.

Example:

• Target owner pay: $70,000
• Overhead: $20,000
• Estimated taxes: $20,000
• Profit goal: $10,000
• Total needed: $120,000
• Billable hours: 1,200 per year
• Minimum hourly rate: $100 per hour

Don't forget direct job costs

For projects with materials or subcontractors, price those separately with a markup. Materials markup covers your time sourcing, picking up, warranting and handling them.

Pricing models to consider

• Hourly: simple, but rewards slowness and caps your income
• Flat-fee or project pricing: customers like predictability; you're rewarded for efficiency
• Monthly packages or retainers: predictable revenue for both sides
• Value-based pricing: based on the result's value to the customer

Check your actual results

Once your bookkeeping is in place, look at:

• Gross margin by service or job: which work is actually profitable?
• Effective hourly rate: revenue ÷ actual hours on a project
• Overhead percentage: is overhead growing faster than revenue?

When to raise prices

• Your calendar is consistently full
• Material or labor costs went up
• Your margins have been shrinking
• You've added skills, credentials or better service

Give existing customers notice and explain the value they receive.

The bottom line

Price from your costs and goals, not from guesses. Know your minimum rate, track job profitability in your books and review prices at least once a year.

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Need help getting this right? TRIG Bookkeeping & Tax Services helps new business owners in Washington with company registration, monthly and annual bookkeeping, and government compliance. Contact us to talk about your business.

This article is general information, not legal or tax advice for your situation. Tax rules and fees change, so confirm current details with the IRS, the Washington Department of Revenue, or a qualified professional.