How to Price Your Services for Profit (Not by the Hour)

Oct 13

9 min read

Key takeaways

How to price your services comes down to one shift: charge for the result your client gets, not the hours you spend. People pay for the outcome, and the outcome is worth the same however fast you deliver it.
Being the cheapest doesn't win you clients. Research on price and perceived quality shows buyers often read a low price as a sign of lower quality.
Industry average isn't a safe default. If the market is full of cheap, average providers, pricing at the middle still sends a weak signal.
Habitual discounting trains clients to wait for the sale. Offering a smaller piece of your offer at a lower price protects your value better.
Test your pricing with a simple sum: price x number of sales = your revenue goal. If it needs 18-hour days to work, the price is wrong.

Kate De Jong and Sam Morris with headphones on

When we sat down to price a small live coaching workshop, Kate's first instinct was to go cheap. Fuel was up, groceries were up, and everyone seemed nervous about money. Dropping the price felt kind.

“We fell into the trap of thinking cheaper might be better. Well, I did.” — Dr Kate De Jong

Sam pushed back. The people coming along would get two of us, with 30 years of business experience between us, looking at their business live. What was that worth to them? That question is the whole episode in a sentence, and it's the heart of how to price your services so your business actually makes a profit.

We're Dr Kate De Jong, a PhD engineer turned business strategist, and Sam Morris, a Navy veteran who's spent 20 years in business working out what makes businesses tick and what makes them stall.

Why does undercharging hurt your business?

Cheap doesn't read as good value. It reads as a warning sign.

Undercharging hurts your business because buyers use price as a signal of quality, so a low price makes people trust you less, not more. It also leaves you working harder for less, which is a fast road to burnout.

A lot of first-time business owners price below their competitors and expect clients to come running. It rarely works. Kate came across a line in her research that sums it up: if you're the cheapest in the room, you're not seen as the best, you're seen as the most desperate.

There's research behind this. Akshay Rao and Kent Monroe's 1989 review in the Journal of Marketing Research pulled together 36 studies and found a moderately large, statistically significant link between price and perceived quality. The wider the price gaps in a market, the more buyers lean on price to judge quality. So if you sit well below everyone else, people notice, and not in the way you want.

Kate put it simply: pricing is a way you can really damage your reputation. If you're the cheapest in the market, there's a perception you can't be that good.

Why do so many of us undervalue our own services?

The things that come easily to you are the things you're most likely to undercharge for.

We undervalue our services because we judge them by how hard they feel to us, not by how hard the problem is for the client. When work sits in your zone of genius, it feels too easy to charge much for.

Sam has said more than once on the show that she's taken for granted the things that come naturally to her. That's the trap. You love the work, it flows, so surely it can't be worth much?

“What you have to remember is that the people that come to you for that service, it's not something that comes naturally to them, it is something that they find difficult.” — Sam Morris

Sam's fix is to move the value off yourself and onto the customer. How they value it, not how you value it.

We spent around three years working only with women, and we saw this pattern a lot. Women who'd built strong careers often priced well when they moved into consulting, because the confidence came with them. But women who felt they were pivoting into something new often got hit with imposter syndrome, and their prices dropped with their confidence. They'd decided they had to prove themselves all over again. Usually they didn't.

That lines up with what Linda Babcock and Sara Laschever found in Women Don't Ask (Princeton University Press, 2003): women initiate negotiations less often than men and are less inclined to advocate for their own pay. Setting your prices is a negotiation with yourself before it's ever one with a client.

Kate's pricing has gone up as her confidence has gone up, and that takes time.

Why is charging by the hour a trap?

The hourly rate ties your income to your time, and your time runs out.

Charging by the hour is a trap because your income can only grow as fast as your hours, and a business owner has far fewer billable hours than they think. Once tax, costs and running the business come out, there's not much left of that hourly rate for you.

New business owners often bring the corporate habit with them: what's my hourly rate? Say it's $200 an hour. In our Profit First episode we looked at how that $200 gets split up, with a chunk set aside for tax and more going into other accounts. What's left to actually pay yourself is a lot smaller.

Then there's the time itself. Sam pointed out that in a job, you're paid for the productive hours and somebody else takes care of everything else. In your own business, that everything else is you: marketing, networking, admin, product development. If you've got kids, they'll get sick. You need breaks. As Sam put it, we've got to switch off the employment brain.

How do you price your services based on value?

Start with what the problem is costing your client, then what solving it is worth.

To price your services on value, work out what the problem is costing your client right now, then what it's worth to them to have it solved. Your price sits against that outcome, not against the hours it takes you.

Kate walks clients through two questions. What is this problem costing the client right now? And how much would they pay to make it go away? In the episode we used a health and wellness example. If your program gets to the root cause of a problem that's costing someone months of appointments and bills, the value to them is far bigger than the five hours it might take you to deliver it.

“People are paying for the result you deliver, not the time you invest.” — Dr Kate De Jong

And here's the part people miss. The longer you're in business, the faster you usually get results. That doesn't mean you should charge less. Sam made the point that it works the other way: as you get better and the results are evident, you charge more and you deliver quicker. The outcome is worth the same to the client either way.

Should you price at the industry average?

The average is only a safe bet if the average is any good.

Pricing at the industry average isn't automatically safe. If the market is full of cheap, average providers, sitting in the middle still tells people you're average.

The rule of thumb we've often used is to look at average competitor pricing and sit around 10% above it. Sam wasn't sold.

“That's making the assumption that you are delivering value that is average plus 10%. And what if that average is actually really poor?” — Sam Morris

We landed somewhere in the middle. Don't be the cheapest, and don't aim to be average. If you've got the right offer and the experience or credentials to back it up, you can charge a lot more than the market rate. Just be wary of popping yourself in the middle because it feels safe.

Sometimes the bigger win is changing the structure, not the number. One of Kate's clients is a residential designer who charged a flat fee of around $5,000 to draw up plans for a renovation. Then he spotted a competitor charging 3.5% of the total build price. On a $700,000 renovation, that's a very different job, and 3.5% still sounds small. It's the same logic real estate agents have used for years. He's testing it now, while he's busy, so he's not attached to the answer.

“That is the best time when you don't need the work to test your pricing strategy.” — Dr Kate De Jong

Is discounting ever a good idea?

A rare, genuine deadline can work. A habit of discounting won't.

Discounting can work as a rare, short-term move, like a genuine early-bird deadline that helps people decide. As a habit, it devalues what you do and teaches clients to wait for the next sale.

Sam called discounting the go-to button people press when they get scared and sales aren't moving. We all know when the Boxing Day sales are, so we wait for them. You don't want your clients doing that with you.

Research backs this up. Carl Mela, Sunil Gupta and Donald Lehmann studied more than eight years of consumer panel data and published their findings in the Journal of Marketing Research in 1997. Their results fit the idea that consumers become more price and promotion sensitive over time as businesses lean on promotions.

So what do you do instead? Sam's answer:

“It is much better for your business to deconstruct your offer and to sell off a portion at a different price point, at a lower price point, because they're only getting a part of your bigger offer.” — Sam Morris

Tiered pricing does the same job. Clients with different budgets get access to you, and nobody gets your full offer for less than it's worth.

Price also has a bigger effect on profit than most people expect. Michael Marn and Robert Rosiello's 1992 Harvard Business Review article, "Managing Price, Gaining Profit", found that across the average economics of 2,463 companies, a 1% improvement in price, with no loss of volume, lifted operating profit by 11.1%. Small changes to price can matter more than a lot of extra hustle.

How do you know if your price will reach your revenue goal?

Reverse-engineer it. The sum will tell you fast.

To check whether your price will reach your revenue goal, multiply your price by the number of times you can realistically sell and deliver it in a year. If the numbers only work with 18-hour days, your pricing needs to change.

Sam shared an exercise that will red flag or green flag your pricing straight away. Pick the income you want in the next 12 months. Say it's six figures. Take your product or service and the price you plan to charge, then work out how many times you'd need to sell and deliver it to get there.

“Because that'll straightaway tell you whether this is all a possibility or you're dreamy.” — Sam Morris

Don't do this sum by dividing by 52 weeks or assuming a 38-hour week of delivery. You can't deliver for 38 hours when you also have to market, sell and run the business. Be realistic about how many hours you'll actually spend on paid work, then price so that number works.

What can you do about your pricing this week?

Three things to try before Friday.

Write down what the problem you solve is costing your ideal client right now, in dollars, time or stress. Then write down what solving it is worth to them. Compare that with your current price.
Run Sam's sum. Your price, multiplied by how many you can realistically deliver in 12 months. Does it hit your revenue goal without burnout hours?
Look at your last three discounts. Could you have offered a smaller part of your offer at a lower price instead?

“There's no quick clear-cut formula for calculating pricing. But there are certainly parameters which you can use to guide you to the right price.” — Sam Morris

Price for Profit: Why What You Charge Says Everything About How You See Your Own Value cover art

Listen to the full episode

Frequently Asked Questions

How do I price my services as a new business owner?

Start with the problem you solve and what it's costing your client, not with an hourly rate. Then check the price against your revenue goal by multiplying it by how many times you can realistically deliver it in a year. Avoid being the cheapest in your market, because low prices can signal low quality.

Is it better to charge hourly or by project?

For most service businesses, pricing by the result or project works better than hourly. Hourly pricing caps your income at your available hours, and as you get faster you earn less for the same outcome. Value or project pricing lets you keep the benefit of getting better at what you do.

How often should I raise my prices?

There's no fixed rule. We review pricing as our confidence, results and demand grow, and the best time to test a new price is when you're busy and don't need the work. That way you're not attached to whether a client says yes.

Should I offer discounts to win new clients?

Use discounts rarely and with a genuine reason, like a real early-bird deadline. Regular discounting trains clients to wait for a sale. Offering a smaller part of your service at a lower price point usually protects your value better.

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