How to price your services

business.gov.au's pricing guide begins with goals. Making a profit is the most common, but a business may also price to win a bigger share of its market, build its reputation or lift demand for a service. It suggests keeping pricing goals in step with your business plan and marketing plan, and thinking about where competitors sit and how much work you can actually take on.

Goals matter because they pull in different directions. Pricing to fill a new calendar quickly and pricing to keep the most profit from every job lead to different answers from the same costs.

The floor under any service price is what it costs you to deliver. For time-based work, that means a cost per billable hour: a year's costs, including your own pay and overheads, divided by the hours you can realistically bill. The hourly rate guide works through the method.

For a set-price job, build the cost up from its parts before you quote:

business.gov.au describes a range of pricing strategies and says you can combine them. The ones service businesses most often draw on are:

• Cost-plus: total the cost of supplying the service, then add a markup or margin.
• Hourly: work out all business costs as an hourly figure and charge for the time spent. business.gov.au notes that businesses and contractors paid for doing work for customers often use it.
• Going rate: price at or near the market leader, guided by competitors but not copying them.
• Value-based: price on what the service is worth to the customer rather than on cost alone, which market testing helps you find.
• Premium: a higher price for exclusive or prestige work, where customers expect top quality and service to match.
• Penetration: a low introductory price to win customers, raised once you have reached your goal.
• Dynamic: prices that change with demand or the time of day, week or year. business.gov.au says this is legal in Australia as long as the prices are clear and fair and don't mislead.

Set-price packages are a way of presenting any of these: the customer sees one price for a defined scope, while you still build it from your costs and the value of the work.

business.gov.au suggests market testing: showing your service to a sample of customers and asking what they want from it, which features matter most, what they spend on similar services and how much they would buy. It also suggests comparing yourself with your main competitors on more than price, including quality and customer service.

Outside influences count too. business.gov.au names price sensitivity, demand and competition among them: some customers react sharply to small price changes, high demand can support higher prices, and more competitors tend to push prices down.

• Put the scope in writing: what is included, what costs extra and how changes to the job will be priced.
• Show your payment terms, the rules for when and how customers pay, on invoices and contracts, as business.gov.au suggests.
• Be ready to itemise. Within 30 days of the original bill, a customer can ask for an itemised version, which business.gov.au says you must supply free within 7 days, setting out how the price was worked out, the labour hours and hourly rate where relevant, and any materials used with the amount charged for them.
• Check any extra charges. business.gov.au says surcharging customers for paying by credit, debit or prepaid card isn't allowed, though other surcharges, such as for weekend or public holiday work, still can be.
• Keep prices clear, accurate and not misleading, as business.gov.au says the law requires.

business.gov.au lists attracting new customers and encouraging repeat business among the reasons to offer discounts, and bundles or packages among the common types. It also notes that discounts have consequences for the bottom line, and suggests planning how and when you will use them and making sure they still cover your costs. Work out what a discount does to the profit on a job before you offer it.

• On set-price jobs, compare the hours actually spent with the hours quoted.
• Work out gross profit by type of service each month, so you can see which work pays for the rest.
• Ask customers for feedback on your prices, one of the checks business.gov.au lists for price reviews.

Come back to your prices at least once a year, as business.gov.au suggests, and sooner if costs rise or the market moves. For help with setting them, business.gov.au names your accountant or a business adviser.