Pricing a service so the business survives the maths
Most small businesses set their price by finding a competitor and going a bit under. It feels safe and it is the single most expensive decision they make, because the competitor's costs aren't yours and the discount comes out of the only money that pays the rent. This is how to price a service properly: what the three methods are actually for, a calculator that tells you how many jobs you need, and the five checks worth running on prices you already have.
A price is doing four jobs at once. It has to cover what the job costs you, cover a share of the costs that exist whether you work or not, leave something over, and tell the customer what kind of business this is. The mistake isn't usually being too cheap in absolute terms — it's setting the number before knowing which of those four jobs is failing.
The arithmetic underneath is short. Every sale has a contribution: what you charge, minus what that particular sale costs you in materials, fuel, subcontractors and card fees. Contribution is what's left to pay for rent, insurance, software, the van and you. Divide your monthly fixed costs by the contribution per job and you have the number of jobs a month that means you broke even. Everything else on this page is a way of moving one of those three numbers.
The reason a discount is expensive: cut a $260 job to $234 and you have given away 10% of the price but 13% of the contribution, because the $58 of materials costs the same either way. At a 40% margin, a 10% discount costs a quarter of the profit on that job. It is very hard to make that back on volume, and the customers a discount attracts are the least likely to come back at full price.
Cost-plus, value, market: what each is actually for
These get taught as three alternatives to choose between. They aren't. For a small service business they're three different questions, and you need the answer to all three before you set a number.
- Cost-plus — the floor
- Work out what the job costs you, add the margin you need, and you have the price below which the job is charity. It's the only one of the three that can tell you a price is wrong with certainty. It cannot tell you a price is right, because customers don't care what your costs are.
- Market — the frame
- What comparable businesses near you charge, which is the range the customer already has in their head. Useful as context and dangerous as a method: undercutting tells you nothing about whether either of you is profitable, and the cheapest business in a market is usually the one about to leave it.
- Value — the ceiling
- What the outcome is worth to this customer: the wedding that can't be rescheduled, the boiler in February, the van off the road costing a tradesperson a day's work. Value pricing is the only one of the three with real upside, and it's the one that requires you to know something specific about who's buying.
How to use all three, in order
Start with cost-plus and get the floor honestly — including your own pay in the fixed costs, which is the step people skip. Then look at the market to see the range you're operating in and, more usefully, to find where the range has a gap. Then ask what the job is worth to the person buying it, and price toward that end of the range rather than the middle.
For most one-person service businesses the answer lands above where they started, because the floor was calculated without the founder's pay and the market comparison was made against businesses with different costs and different customers. If your price ends up below the floor, you don't have a pricing problem — you have a cost problem or a volume problem, and no amount of positioning fixes it.
Where each one fails
Cost-plus fails when you get faster. Get twice as good at a job and cost-plus halves your price for it, which is exactly backwards — the customer is buying the result, not the hours. Market pricing fails when the comparison isn't like-for-like, which it almost never is: the cheap competitor may have a spouse's income, no insurance, or a van they already owned. Value pricing fails when you can't articulate the value, which means it fails whenever you're selling something generic — and the fix is to stop selling something generic rather than to keep cutting.
Break-even and margin
Price and direct costs in, and out comes the contribution on each sale, the number of hours or jobs a month that covers your fixed costs, the profit at the volume you actually have, and the price that would just break even at that volume. Switch between hourly and per-job, because most service businesses quote one way and think in the other.
- Contribution per job
- $194.16 $260.00 in, less $58.00 of direct cost and $7.84 of card fee — a 75% margin. This is what each job actually contributes to rent, insurance and your pay. That's $64.72 an hour once the 3 hours are counted.
- Break-even
- 21.6 jobs a month, to cover $4,200 of fixed costs. You're planning on 24 — 2.4 jobs of headroom.
- Profit at 24 jobs a month
- $460 After your own pay, because that's in the fixed costs. To clear $1,000 on top you'd need 26.8 jobs — or a price of $283.18 at the volume you have.
- The price that just breaks even
- $240.27 At 24 jobs a month. Anything below this is a job you are paying to do. Raise your price 10% and you could lose 12% of your jobs and still make the same money.
Contribution margin, not net margin: fixed costs are covered by volume rather than allocated per sale, which is the only version that answers “how many do I need”. Sales tax is excluded — it isn't yours. Income and self-employment tax come out of the profit line, so a business aiming to keep a number after tax should raise the target by roughly a third. Nothing typed here leaves your browser.
The billable-hour trap
Here is the calculation that ruins one-person businesses. Someone leaves a $60,000 job, wants to earn the same, works out that 60,000 divided by 2,000 hours is $30 an hour, and charges $45 to be safe. Then they discover three things in sequence.
A working hour is not a billable hour. Quoting, travelling, invoicing, chasing payment, buying materials, doing the books, answering the phone: a full-time one-person service business typically bills 90 to 120 hours a month, not 160. At 100 billable hours, that $45 rate produces $4,500 a month, not $7,200.
An employee's salary isn't their cost. The employer was also paying half their payroll tax, their health insurance, their equipment, their software, their holiday and their sick days. Self-employed, all of that is yours — and self-employment tax alone is 15.3% on 92.35% of net earnings, roughly 14% of the profit, before any income tax at all.
Fixed costs don't care how busy you are. Insurance, the van, the phone, the software and the rent go out in a slow month exactly as they do in a good one, which is why break-even is measured in jobs per month rather than in a percentage.
Put those together and the honest version of "I want to earn $60,000" is: fixed costs of, say, $2,400 a month plus $5,000 of pay is $7,400 a month to cover, at 100 billable hours, with $12 an hour of materials — so $86 an hour, before tax and before a single unpaid invoice. Not $45. That gap is the whole reason the calculator above puts your own pay in the fixed costs where you can see it.
The five checks a pricing health review runs
For a business that already has prices, this is the review worth doing twice a year. It takes an hour with your own numbers and each check has a clear pass mark.
Does every line clear the floor?
Take each service you sell, subtract its direct costs and the card fee, and check what's left is a margin you can live on. Fail: anything at or below the break-even price the calculator gives you at your actual volume. Almost every price list has one or two lines that lose money, usually the small job that was added as a favour and became a third of the bookings.
How long since anything moved?
Prices set two years ago are being paid with money worth less, against materials that cost more. Fail: no change in eighteen months. The fix isn't a dramatic rise — it's a small one, on new customers first, applied regularly enough that it stops being an event.
What's your close rate?
Count the last twenty quotes and how many were accepted. Fail high: above about 80% almost always means you're too cheap — nobody wins nearly every job at the right price. Fail low: below about 20% usually isn't the price at all, it's who you're quoting to, or how long you take to reply. Somewhere in the 30–60% band is where a healthy small service business tends to sit.
Are your best customers on your worst terms?
Sort your customers by revenue and check what each actually pays per hour of your time. Fail: the biggest customer has the oldest, lowest price — which is the usual finding, because they were the first, negotiated hardest, and have never been re-quoted. This is the single most common place a small business is losing money, and it's the most uncomfortable to fix.
Is there anything above your top price?
If your dearest option is what most customers choose, the price list is capped below what someone was willing to pay. Fail: no tier above the popular one. Adding a genuinely better option — faster, guaranteed, included follow-up — raises the average without touching anyone's existing price, and it makes the middle option look like the sensible choice rather than the expensive one.
Raising a price without losing the business
The fear is losing customers. The maths says how many you could afford to lose, and the answer is reassuring. Here's a 10% rise at four different starting margins — how much extra contribution it produces per sale, and the share of your volume you could lose and still end up in exactly the same place.
| Starting margin | Contribution now | After +10% | Change | Volume you could lose |
|---|---|---|---|---|
| 30% | $30.00 | $40.00 | +33% | 25% |
| 40% | $40.00 | $50.00 | +25% | 20% |
| 50% | $50.00 | $60.00 | +20% | 17% |
| 65% | $65.00 | $75.00 | +15% | 13% |
At a 40% margin, a 10% rise adds a quarter to the contribution on every sale and you could lose a fifth of your customers and be no worse off — while doing less work, with less wear on the van, for the customers who valued you most. In practice you rarely lose anything like that; the usual outcome of a single-digit rise is a couple of grumbles and no lost work. And note which way the table runs: the thinner your margin, the more a rise is worth and the less volume you need to keep. The businesses that most fear raising prices are the ones that most need to.
How to actually do it
New customers first — change the number on new quotes today and see what happens to the close rate over twenty quotes before touching anyone existing. Then existing customers, with notice: a short message a month ahead, the new price, the date, no apology and no lengthy justification. "From 1 November the standard service is $88" is a complete sentence. Explaining at length invites a negotiation you didn't need to have.
Grandfather sparingly. One loyal customer kept at the old price is generosity; a whole book of them is a business running two price lists forever, and the old one always ends up being the busy one. If you want to soften it, offer the old price for a fixed period rather than indefinitely.
And if you genuinely can't raise the headline number — a fixed market, a contract, a platform that sets it — the same money is available on the other side of the equation: cut the direct cost per job, cut the time each job takes, or move the mix toward the services with the best contribution. Watch what it does to the runway rather than to the revenue line, because revenue that costs more than it brings in is just faster failure. The runway calculator shows the difference.
Common questions
How do I work out my hourly rate?
Add your monthly fixed costs — rent, insurance, vehicle, software, phone, and your own pay — then divide by the hours you'll actually bill in a month, which for a full-time one-person business is usually 90 to 120 rather than 160. Add the direct cost of an hour's work and the card fee. That's the floor. Price above it, not at it, and check the answer against what comparable businesses near you charge.
Should I price by the hour or by the job?
Quote by the job wherever you can. The customer wants to know what it costs, not what it costs per hour, and a fixed price rewards you for getting faster instead of punishing you. Keep the hourly figure for yourself, as the check on whether a job was worth doing: contribution divided by hours is the number to compare across everything you sell.
How much margin should a small service business make?
On contribution — price minus the costs that scale with each sale — 50% or better is comfortable for a service with low materials, and 30–40% is normal where parts or subcontractors are involved. Below 30% the business needs high volume to survive and has almost no room to absorb a bad month. Net margin after all fixed costs and the owner's pay is a different and much smaller number.
Is it a mistake to be the cheapest?
Usually, unless low cost is genuinely how the business is built — you have a structural advantage the competition can't copy. Otherwise the cheapest price attracts the customers most likely to leave for someone cheaper, gives you the least room for error, and makes every mistake expensive. Being the second dearest with a clear reason is a far more comfortable place to run a small business from.
How often should I raise prices?
Small and regularly beats large and rarely. An annual review, applied to new customers first, keeps you level with costs without ever needing a conversation that feels like an event. If nothing has moved in eighteen months you are almost certainly behind, because your materials, insurance and fuel have not stayed still.
What do I say when a customer asks for a discount?
Change what's included rather than the price: a smaller scope, a longer lead time, a different tier. That protects the price for everyone else and keeps the conversation about what they get rather than what you'll take. If you do discount, make it explicit, temporary and tied to something — a first job, a multi-job booking, an off-peak slot — so it doesn't quietly become the new price.
Do card fees really matter at this size?
They add up: Stripe's standard US online rate is 2.9% plus 30¢ per transaction, so on a $60 job that's $2.04, which is 3.4% of the sale and rather more of the profit on it. It matters most on small tickets — the 30¢ is 6% of a $5 sale — which is an argument for minimum order values rather than for refusing cards.
Prices with the reasoning attached.
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