Charging too little is one of the most common reasons small businesses struggle. A sustainable price covers your living costs, business costs, tax and the time you are not paid for. This guide walks you through a practical calculation you can repeat each year.
Step by step
Set your income target
Decide how much you need to take home each year to cover your living costs, savings and pension contributions. Be realistic rather than optimistic. This is the starting point for your calculation.
Add your business costs
List yearly business costs such as tools, materials not recharged to clients, vehicle costs, insurance, phone, software, accountancy and marketing. Add them to your income target. Remember to include tax and National Insurance on your profits, using current GOV.UK guidance to estimate them.
Count your billable hours honestly
Start with the weeks in a year and subtract holidays, bank holidays, likely sickness and training. Then estimate how many hours a week you can actually charge for, after quoting, travel, admin and marketing. Many sole traders find their billable hours are much lower than their working hours.
Calculate your rate
Divide your total yearly requirement by your billable hours to get a minimum hourly rate, then multiply for a day rate if you prefer. This is the rate below which you are effectively losing money. Round up to allow for slow months.
Compare with the market
Look at what others with similar experience charge in your area. If your rate is higher, think about what makes your service worth more, such as reliability, specialist skills or guarantees. If it is much lower, check you have not missed costs.
Decide how to present prices
Choose whether to quote by the hour, by the day or by the job. Fixed prices for defined jobs are often easier for customers to accept, but only if the scope is clear. Record your rate and review it at least once a year.
Ready-to-use checklist
- Yearly income target set
- Business costs listed and totalled
- Tax and National Insurance estimated
- Realistic billable hours calculated
- Minimum hourly and day rates worked out
- Market rates compared
- Pricing approach chosen and review date set
Practical tips
- Include a contingency in fixed-price quotes for jobs with unknowns.
- Charge separately for materials and travel where appropriate, and state this clearly.
- Give existing clients notice before a price increase.
Common problems
My calculated rate is higher than competitors.
Check your assumptions, then focus on the value you offer. Some clients prefer to pay more for reliability and quality.
Clients keep asking for discounts.
Offer to adjust the scope rather than the rate, so the price still reflects your time and costs.
I do not know my costs yet because I have just started.
Use sensible estimates and revisit them after three months with real figures.