Pricing a Service: Step by Step with a Worked Example

You need to send a quote and you're wondering: what should my service cost? Many people reach for a number that feels right or is based on what the competition charges. The problem: whether that price actually covers your costs often only shows up on your bank account months later. A proper pricing calculation flips the order. You first work out what you need, then derive a price from that – one you can justify.

This article walks you through pricing a service in six steps – with a fully worked example.

Why a gut-feeling price is risky

With services, there's no cost of goods you can simply add a markup to. Your most important raw material is your time, and it's limited. A price that's too low doesn't stand out on a single job; it shows up at the end of the year when too little is left over – even though you worked a lot.

That's why pricing a service always rests on two questions: What does one hour of my work really cost me? And how many hours go into this service?

The 6 steps of pricing a service

Step 1: Set your annual costs and owner's salary

First, collect everything your business costs per year: office or workspace, software, insurance, bookkeeping, training, marketing, equipment. These are your operating costs.

Add to that your owner's salary – the amount you personally need to live on, plus health and pension insurance and a buffer for taxes. You can read how to derive this figure properly in the article Calculating your owner's salary.

As a third block, plan for a profit: for reserves, investments and weak months. If you only calculate to cover costs, you have no room to maneuver.

Step 2: Derive billable hours and your hourly rate

You have to earn your annual costs with the hours you can actually invoice. Vacation, public holidays, sick days, client acquisition, bookkeeping and training all drop out. What's left is usually far less than your total working time.

Hourly rate = (operating costs + owner's salary + profit) ÷ billable hours

You'll find the derivation in detail under Calculating your hourly rate as a freelancer. If you want to check your numbers quickly, the free hourly rate calculator helps.

Step 3: Estimate the effort for the service

Now it's about the specific service. Break it down into work packages and estimate the hours for each one. The smaller the packages, the more realistic the estimate. Don't forget the invisible parts: coordination with the client, revision rounds, project organization, handover.

A helpful trick: don't just estimate the normal case, but also what happens if things get stuck. The difference shows you how much buffer you need.

Step 4: Add direct costs

Some costs arise only for this job: licenses, materials, subcontracted services, travel expenses, stock photos. These items don't belong in the hourly rate; they're charged one-to-one to the job – and when you pass them on, feel free to add a small markup for your procurement effort.

Step 5: Buffer, minimum price and quote price

Working time times hourly rate plus direct costs gives you your minimum price. Below that, you're losing money. On top of this minimum price comes a risk buffer for extra effort, which almost always crops up with flat-rate quotes. The result is your net quote price – plus VAT, depending on your situation.

Step 6: Market check and post-calculation

Only now do you look at the market. If your price is well above what clients are used to, you have three levers: adjust the scope, work more efficiently, or sharpen your positioning. The minimum price remains the lower limit.

After the project, compare estimated and actual hours. This post-calculation is the most important source for getting more accurate with your next quote.

Practical example: pricing a website project

The following example is entirely fictional. The numbers are for illustration only – plug in your own values.

Mara is a freelance web designer. A small trades business asks for a new five-page website. She's supposed to quote a flat price.

Steps 1 and 2: Mara's hourly rate

The tax buffer here is a flat assumption. THA·ONE is a planning aid, not tax advice within the meaning of the German Tax Advisory Act (StBerG) – how big your personal buffer should be is best clarified with your tax advisor.

Mara reckons with 213 working days (after deducting weekends, 30 days of vacation, public holidays and a few sick days) at 8 hours each, i.e. 1,704 hours. From experience, she can bill about 60% of that, around 1,020 hours.

Hourly rate: €69,600 ÷ 1,020 hours = €68.24. She calculates with €70.

Step 3: Estimate the effort

Step 4: Direct costs

Step 5: From minimum price to quote price

Mara quotes the website at €6,150 net. In the quote, she describes exactly what's included: five pages, two revision rounds, handover. Additional requests are billed at her hourly rate.

Step 6: What the post-calculation shows

Suppose the project ends up taking 90 hours instead of 72 – the client delivers content late, and a third round of revisions is added. Then, after deducting direct costs, €5,550 remains for 90 hours, i.e. €61.67 per hour. That's below Mara's target of €68.24.

Without the risk buffer it would be worse: €5,040 ÷ 90 hours = €56. The buffer limited the damage but didn't prevent it. For the next quote, Mara now knows: entering content and revisions need more time – or the scope has to be limited more clearly.

Typical pricing mistakes

Calculating with total working time instead of billable hours

If you count all your working hours even though only part of them can be billed, your hourly rate ends up far too low – by around 40% in the example above.

Forgetting invisible hours

Coordination, emails, writing the quote, sending the invoice: these hours don't appear in any work package and are missing from the price later on.

A flat price without a scope description

A flat price only works if the scope is clear. Otherwise the project grows and the price stays the same.

Going below the minimum price to win the job

A discount below the minimum price isn't marketing; it's a loss you have to make up with other jobs.

How to use the calculation long-term

The calculation isn't a one-off project. If your costs, your utilization or your owner's salary change, your hourly rate shifts – and with it every quote price. It's worth reviewing the numbers once a year. A pricing tool like the one from THA·ONE works out your hourly rate, minimum price and scenarios based on your costs and utilization, so you don't start from scratch with every quote.

Conclusion

Pricing a service isn't an art; it's a sequence: set annual costs and owner's salary, determine billable hours, derive the hourly rate, estimate the effort, add direct costs, put a buffer on top. The result is a minimum price you know and a quote price you can justify. The market comparison comes at the end – not the beginning. And the post-calculation makes sure every quote is a little more accurate than the last.