How to price your work as a small business

Most small businesses set their prices by looking at someone else's and going slightly under. That is not pricing — it is copying a stranger's cost base, their overheads and their mistakes, and then undercutting yourself for the privilege. The arithmetic that replaces it takes an afternoon and it is the highest-value afternoon available to you.

The number nearly everybody gets wrong

The fatal error is pricing an hour as though every hour is billable. It is not. A working week contains quoting, travel, chasing invoices, buying materials, cleaning the van, answering messages and the job that fell through — none of which anybody pays you for directly.

If you work 40 hours and 25 of them are billable, then your rate has to cover all 40. Charging a rate calculated on 40 billable hours produces a business that is busy, exhausted and quietly losing money, which is the single most common shape of small business failure.

So the first task is honest: over a normal month, how many hours did customers actually pay for?

What the rate has to carry

Write down everything the business consumes in a year, not just the obvious items:

• Your own wage — a real one, at the level you would have to pay someone to do your job.
• Vehicle, fuel, insurance, servicing.
• Tools, replacement, software, phone.
• Public liability and any professional insurance.
• Accountant, bank charges, subscriptions.
• Holiday, sick days and a pension. Nobody funds these for you.
• Waste disposal, materials wastage, the job you had to go back and fix.
• Something for the business itself — equipment, slack, a bad quarter.

Total it, divide by your genuinely billable hours, and you have your floor. Not your price — your floor. Anything below it is you paying a customer to let you work.

Three ways to price, and when each fits

1. Cost plus. What it costs you, plus a margin. Honest, simple, and the right method for materials-heavy work — but it rewards you for being slow and penalises you for being good, because getting faster reduces your income.
2. Market rate. What comparable businesses charge. Useful as a sanity check, dangerous as a method: you cannot see their costs, their volume or whether they are profitable at all.
3. Value. What the outcome is worth to the customer. The most profitable and the hardest — it works where the result matters far more than the hours, and it requires you to know what the customer is really buying.

Most small businesses should start from cost-plus to find the floor, check against market rate for sanity, then move towards value pricing for the work they are genuinely best at.

Give options, not one number

A single price is a yes-or-no question, and a proportion of people answer no on principle. Two or three options change the question to "which one", which is a far easier question to answer positively.

Two or three, not six. A basic version, the one you expect people to take, and a fuller one. The fuller option earns its place even when nobody buys it, because it makes the middle option look measured rather than expensive — and occasionally someone takes it, which is money you would never have asked for.

Raising prices

The fear is losing everyone. What actually happens is that you lose some of the least profitable customers, which is the point.

Run the numbers before you flinch. If you raise prices by 10% and lose 10% of customers, you are doing less work for the same money and your costs have fallen. That is a better business, not a smaller one.

Practical rules: raise for new customers first, so nothing is disrupted while you find out how it lands. Give existing customers notice and a date rather than a surprise. Do not apologise or over-explain — a price is a fact, and defensiveness invites negotiation that would not otherwise have happened.

Watch the VAT step

If you are approaching the VAT registration threshold, model it before you get there. Crossing it means either absorbing VAT out of your margin or raising prices by a fifth to consumers who cannot reclaim it — and there is a band of turnover just above the threshold where a business earns less than it did below it.

This is a genuine cliff rather than a slope, and it is worth an hour with an accountant rather than an evening with a spreadsheet.

When someone says it is too expensive

Usually it means one of three things, and only one of them is about money: they cannot afford it, they do not understand what is included, or they do not believe it is worth it.

Do not drop the price reflexively — that answers only the first and teaches every future customer that your first number is negotiable. Ask what they are comparing it to. Half the time the comparison excludes something yours includes, and saying so converts the job at full price. If they genuinely cannot afford it, offer a smaller scope rather than the same scope cheaper. Reducing what you do protects the rate; reducing the rate does not.

Two habits worth more than the method

Write your prices down. Quoting from memory produces a different number depending on your mood, how busy you are and how much you like the customer. A written price list makes quoting fast, consistent and defensible.

Track what each job actually took. Not to the minute — to the half hour. After twenty jobs you will know which work is profitable and which has been quietly subsidised by the rest, and that is usually a surprise.

The bottom line

Work out your true cost across the hours customers actually pay for, treat that as a floor rather than a price, offer two or three options instead of one number, and raise prices on new customers first. Stop pricing by looking sideways — the business you are copying may be as lost as you were. See also writing an offer that works and competing with a bigger competitor.