A Complete Guide to Service Pricing for Small Business Owners
Service pricing is one of the trickiest parts of being a small business owner. Especially because it’s dependent on a number of factors, like your competition, location, market demand, finances, staff, marketing, and the services you offer.
With so many things to consider, pricing your services so that you not only cover your expenses but make a profit can feel like a balancing act.
Develop an effective service pricing strategy (or improve your existing one) by following these tips and best practices to improve your chances of long-term profitability and success.
What is service pricing?
At its most basic, service pricing is the strategy you use to charge clients for your services. It has two main goals:
- To ensure you cover expenses and turn a profit
- To be fair, reasonable, and consistent for your customers
Unlike product pricing, service pricing is impacted by all kinds of different factors, which makes it virtually impossible to offer a “one size fits all” option.
For example, if you own a house cleaning business, your price may change depending on how big the home is, whether there are any pets, and if it’s a deep clean or not as these factors can impact the amount of time and materials it takes to complete the job.
And, as labor and material costs change over time, so should your prices.
For these reasons, it’s important to use a pricing formula instead of setting your service business prices off the cuff so you can provide accurate job quotes to your clients.
Service pricing terms to know
Setting service prices can come with information overload. Here are some popular accounting terms you can refer back to when needed:
1. Profit margin
A profit margin is the net amount of money your business has made after subtracting all your direct costs like overhead expenses, materials, etc. In order to price a job to ensure a healthy profit margin, you need to mark up the cost of the job.
If you aren’t sure how to figure out what a healthy profit margin should be, use our free profit margin calculator to get started.
2. Profit
Profit is the amount that you’re left with after subtracting all of your business expenses from the payments you received. If you’re left with a positive number, it means you’re making more than you’re spending. But if you’re left with a negative number, you need to consider increasing your profit margin, lowering costs, generating more leads, or evaluating your pricing strategy.
3. Overhead costs
Overhead costs, also called operational costs, are the indirect expenses that you need to pay to run your business, like marketing costs, renting out an office, vehicle insurance, etc.
These are the bills you need to pay to keep your business running.
It’s important to note that you don’t charge the entire cost of your overhead expenses to each individual job, but a portion of them based on your average monthly business income and costs.
4. Markup
Markup is how much more you charge for a product or service after the costs have been covered to ensure you make a profit. Markup can be charged as a dollar amount or percentage and should be based on your desired profit margin.
How to price your services
Many service businesses use a cost-plus pricing structure as their base model and add additional pricing strategies to it as they go, like promotional pricing or tired-pricing. This is because cost-plus pricing is a straightforward way to ensure you cover costs and make a profit.
The formula for this method looks like this:
Labor costs + Material costs + (overhead + equipment costs) + profit margin
Use these steps as a guideline to developing your own cost-plus service pricing model.
1. Calculate your costs
The first thing you need to do is determine how much labor, materials, and overhead will cost you.
Labor and materials are the costs required to complete a specific job, such as employee wages and supplies. For example, in a landscaping business, these may consist of contractor or employee pay, sod, grass seed, and fertilizer.
Overhead is made up of the indirect costs you pay to run your business, like rent, software subscriptions (such as Jobber), advertising, administrative staff wages, equipment, etc.
Once you have these numbers, add them to your formula—just make sure they’re accurate.
It’s important not to rely on your gut when it comes to estimating your costs, even if they seem easy to calculate. Instead, consult with your bookkeeper or accountant to get accurate numbers, especially if your business experiences seasonal surges.
Green industry business consultant Jason Creel suggests that when including labor in your price, you should consider how much effort is required per person.
“When I say $60 per hour, I’m talking about the rate per person. So if you have a two-man crew, you’re looking at $120 per hour. If you have a three-man crew, $180 per hour. If I’ve got a two-man crew and we’re cutting grass and it took us 30 minutes to cut, that’s a $60 lawn.”
2. Assess your competitors and the market
Next, take a look at what your competitors are doing and what the market looks like in your area.
For example, what do both your lowest- and highest-charging competitors offer to clients and how do they differ from you?
This will help to give you a baseline for what you should charge. While this information doesn’t directly apply to your service pricing formula, it does help you to choose the right profit margin, preventing you from starting too high or too low.
If you want to charge more than your competitors, you will need to show your customers what sets you apart from the competition. Do you offer a premium experience? Do you use high-end materials? Do you have specialized skills or certifications?
On the other hand, it also helps to ensure you don’t charge too little, giving you the best chance at making a healthy profit from the get-go.
3. Choose a reasonable profit margin
The last part of your formula is made up of your profit margin. This is charged on top of your expenses and should also reflect your competitor research to ensure it’s fair and reflects market conditions.
Your profit margin will depend on your industry, costs, pricing, business goals and other factors, so it can vary greatly from one company to another.
For example, the average HVAC profit margin is anywhere from 8% to 40%.
The most important thing is that your profit margin reflects your business needs.
Once you have a specific profit margin in mind, use it to determine what your markup should be.
Use this table to get an idea of how much of a markup you need to hit a specific profit margin:
| Markup | Profit Margin |
|---|---|
| 10% | 9% |
| 20% | 17% |
| 30% | 23% |
| 40% | 29% |
| 50% | 33% |
| 60% | 37% |
| 70% | 41% |
| 80% | 44% |
| 90% | 47% |
| 100% | 50% |
4. Add up your numbers
Once you’ve calculated all your costs, reviewed competitor pricing in your area, and selected a reasonable profit margin, it’s time to see what your numbers look like when applied to individual jobs. To do this, you use the following formula:
Total costs x (1 + markup)
Before you apply it in the real world, try it out on a few business cases to get a feel for how it will work in practice.
Once you test out your numbers, evaluate whether your prices are too low or too high for your area or in comparison to your competitors. If so, you may need to adjust your formula to have a lower markup or find a way to reduce your costs.
Industry-specific pricing guides
You can also use these industry-specific pricing guides to get a head start:
Common service pricing models
Choosing which service pricing formula to use depends on many different factors including the services you offer, how many competitors you have, and your overall vision for the company as you grow.
Most service businesses use one of the following service pricing formulas, or mix them up as necessary.
1. Value-based pricing
Value-based pricing is determined by the perceived value of the service you’re providing to a customer rather than the desired profit margin or competitor influence.
In other words, this type of pricing is based on how much you believe your customer thinks your services are worth.
For example, if you’re the only business in your area to offer a specific service or cater to a niche group of customers, you may be able to charge more than if you were in a bigger town with more competitors.
2. Cost-plus pricing
Using cost-plus pricing, the price of your services is determined by adding a specific markup to a product’s unit cost. This strategy is often tied to a specific profit margin goal.
Using this pricing structure, you calculate the cost of your materials and labor, then add an additional percentage based on the profit margin you want to make on the job.
3. Fixed pricing
Fixed pricing is when you set a specific price for a service and stick to it. So, instead of adding up labor and materials as you go, you would charge the same price regardless of the time spent on the job or the amount of supplies you used.
Fixed pricing is often used for straightforward jobs that are easy to estimate costs for. If you choose to use this method, don’t forget to set limits to what is included in (or excluded from) the fixed price, such as the size of the service area.
4. Hourly billing
With this model, you bill clients for the number of hours you’re on the job. The success of this method depends on accurate time-tracking, so it’s important to either track your time yourself or use time tracking software to do it for you.
5. Competitive pricing
Competitive pricing is when you set your prices based on what your competitors are charging. That means taking a look at not only what they charge, but what they offer and who their clients are, then comparing that to your own business.
6. Promotional pricing
Promotional pricing is when you offer discounts or promotions on certain products or services. For example, you may offer a 10% discount to every new customer who books with you.
Promotional pricing isn’t a base pricing model, but one that you add on top of your standard pricing. It can be used to expand your customer base, build interest in your off season, generate referrals, and more.
7. Tiered pricing
Tiered pricing is when you offer different levels of service within certain price ranges. For example, many service providers use this type of good, better, best pricing to offer basic, standard, and premium packages with basic being the most budget-friendly and premium the most expensive.
Here’s what tiered pricing looks like with Jobber’s quoting software:
This allows you to cater to a variety of different customers with different budgets and gives you opportunities to upsell packages.
For example, if you decide that your services fall somewhere between the lowest- and highest-priced competitors, you would set your service prices in the middle.
READ MORE: 13 service pricing strategies for your business
Service pricing is one of the most important parts of getting your business up and running. It directly impacts whether you turn a profit, which customers you attract, and whether your business is sustainable long-term.
Remember to use accurate numbers, healthy profit margins, and reasonable markups to keep both you and your clients happy.
Originally published in July 2020. Last updated on July 18, 2024.