How do you price a service business?

The floor calculation comes first because it tells you what you cannot go below. Add your target annual income, self-employment and income taxes, business expenses, insurance, software, retirement contributions, and unpaid time off. Then divide by realistic billable hours. That second number is where most people go wrong: a full-time independent professional typically bills somewhere around 1,000 to 1,200 hours a year rather than 2,000, because selling, admin, invoicing, and gaps between projects consume the rest. Dividing by 2,000 produces a rate that cannot cover the year no matter how hard you work.

Above that floor, three models dominate. Hourly billing is easy to explain and structurally penalizes efficiency, since getting faster reduces your income for the same result. Project or fixed-fee pricing transfers the efficiency gain to you and gives clients budget certainty, at the cost of scope risk, which is managed by defining deliverables and revision limits in writing. Value-based pricing sets the fee against the outcome delivered rather than the effort spent, which is the highest-leverage model and requires being able to articulate and ideally measure that outcome. Retainers add predictability for both sides and are worth pursuing once a client relationship is established.

Two pricing errors are near-universal among newer businesses. The first is anchoring to competitors, which imports their cost structure, their positioning, and possibly their mistakes into your business. The second is discounting to win work, which attracts the most price-sensitive clients, who are consistently the most demanding, and makes raising rates later harder because the anchor is set. Raise prices on new clients first, quote the number without apologizing or immediately offering alternatives, and expect that losing some proportion of prospects on price is evidence the rate is roughly correct rather than evidence it is too high.