Question 1

How do I calculate the selling price from cost and target margin?

Accepted Answer

To find the selling price that achieves a target gross margin: Selling Price = Cost / (1 − Target Margin %). This is called the 'cost-plus margin' method. Examples: 40% target margin on £60 cost: Price = £60 / 0.60 = £100. Check: (£100−£60)/£100 = 40% ✓. 30% target margin on £70 cost: Price = £70 / 0.70 = £100. 25% target margin on £75 cost: Price = £75 / 0.75 = £100. Common mistake: adding the target percentage to cost (that gives you markup, not margin): £60 + 40% = £84 gives only a 28.6% margin, not 40%. Always use the division formula for margin-based pricing.

Question 2

What is the difference between cost-plus pricing and value-based pricing?

Accepted Answer

Cost-plus pricing: starts from your cost and adds a markup or target margin to reach a price. Simple to calculate and guarantees a profit margin, but ignores what customers are willing to pay. Risk: you may price too low if customers would pay more. Value-based pricing: starts from the value delivered to the customer and works backwards. You research what customers would pay for the outcome you deliver, then check if that price covers your costs and leaves an acceptable margin. Typically results in higher prices — and higher margins. Risk: requires customer research and confidence in your value proposition. Recommendation: calculate your minimum viable price (cost-plus) then compare to what competitors charge and what customers value — price as close to value-based as the market allows.

Question 3

How should freelancers calculate their day rate or hourly rate?

Accepted Answer

Freelancer rate calculation: (1) Calculate your annual income target (after tax, with enough to save). (2) Add your business costs (software, equipment, insurance, accountant, marketing). (3) Add a buffer for holidays, sick days and gaps between projects — typically 30–40% of the year is non-billable. (4) Divide the gross total (before tax) by your billable days/hours. Example: Income target £50,000 after tax; gross equivalent ~£70,000 (assuming 30% effective tax rate). Business costs £5,000. Total needed: £75,000. Billable days: 220 days × 60% utilisation = 132 days. Day rate = £75,000 / 132 = £568/day. Hourly rate (8h day) = £71/hour. Always round up — it's easier to negotiate down than to raise your rate.

Question 4

What happens if I price too low?

Accepted Answer

Under-pricing has consequences beyond lost revenue: Cash flow: low margins leave no buffer for unexpected costs, late payments or slow months. Quality perception: price signals quality — clients often associate low prices with low quality and may avoid you or devalue your work. Scope creep: clients who pay less often demand more, and say no becomes harder when you feel underpaid. Growth: thin margins leave no money to invest in marketing, staff, tools or training. Race to the bottom: competing on price attracts price-sensitive clients who will leave the moment someone cheaper appears. The fix: calculate your true minimum price (cost + minimum viable margin), then research market rates and move up towards value-based pricing. A 10–20% higher price with the same conversion rate dramatically improves profitability.

Pricing method	Formula	Example (cost = £60)
Target margin (recommended)	Price = Cost / (1 − Margin%)	40% margin → £60/0.60 = £100
Cost-plus markup	Price = Cost × (1 + Markup%)	40% markup → £60×1.40 = £84 (28.6% margin)
Keystone pricing	Price = Cost × 2 (100% markup)	£60×2 = £120 (50% margin)
Competitive pricing	Match or undercut market price	Market £110 → Price £105 (43% margin on £60 cost)
Value-based pricing	Price = Perceived customer value	Outcome worth £500 → Price £300–£400 (regardless of cost)

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