🎯 In 30 seconds: Start from your full cost, including the hidden cost of labor and the hours you can’t bill, then price on what the customer values and check the market. Know the difference between markup and margin, because confusing them is a common way to underprice. A 10% price rise can cost you a fifth of your volume and still leave gross profit unchanged.
Three ways to set a price
- Cost-plus: your cost plus a fixed percentage. Simple and safe as a floor, but it ignores what customers would pay.
- Value-based: what the result is worth to the customer. A same-day plumber or a reliable weekly cleaner can charge more because the customer values speed and trust.
- Competitive: anchored to local prices. Useful as a check, risky as the only method, because you don’t know competitors’ costs.
In practice: cost-plus sets the floor, competitors show the range, value decides where in the range you sit.
Markup vs margin
Markup is profit as a percentage of cost. Margin is profit as a percentage of the selling price. Same dollars, different base. Margin = markup ÷ (1 + markup). To hit a target margin: price = cost ÷ (1 − margin).
| Markup on cost | Gross margin | $60 cost sells for |
|---|---|---|
| 25% | 20% | $75 |
| 50% | 33.3% | $90 |
| 66.7% | 40% | $100 |
| 100% | 50% | $120 |
| 150% | 60% | $150 |
| 200% | 66.7% | $180 |
If you need a 50% margin and mark up 50%, you land at 33%.
Labor burden: what an hour of pay really costs
An employee’s wage is not their cost. On top come employer Social Security and Medicare (7.65%), federal and state unemployment tax, workers’ comp, paid time off, and any benefits. The Bureau of Labor Statistics found that for private-industry employers in June 2026, benefits made up 30% of total compensation cost and wages 70%. A small business without health benefits will usually sit lower, but rarely below 15% to 20% once payroll taxes, workers’ comp and paid holidays are counted. Ask your payroll provider and insurer for your actual figure.
Worked example: pricing a service hour
A two-van repair business. Illustrative numbers:
| Technician wage | $25 per hour |
| Burden (taxes, comp, PTO) | 25%, so $31.25 per paid hour |
| Paid hours per year | 2,080 |
| Yearly labor cost | $31.25 × 2,080 = $65,000 |
| Billable hours (driving, quoting and training aren’t billable) | 1,400 |
| Labor per billable hour | $65,000 ÷ 1,400 = $46.43 |
| Overhead (vans, insurance, software, office, owner admin) per tech | $60,000 ÷ 1,400 = $42.86 |
| Full cost per billable hour | $89.29 |
| Price for a 15% net margin | $89.29 ÷ 0.85 ≈ $105 |
Pricing off the $25 wage with a “double it” rule gives $50, which loses about $39 on every billed hour. The billable-hours line is where most new owners are too hopeful. Track it for a month before trusting it.
When and how to raise prices
Signs it’s time: your calendar is full weeks out, nobody ever pushes back on a quote, costs rose and margin fell, or you haven’t changed prices in a year.
The math is friendlier than it feels. Say a job sells for $100 and costs $60 (40% margin, $40 gross profit). Raise it 10% to $110 and gross profit becomes $50. To earn the same total gross profit you need only $40 ÷ $50 = 80% of the jobs. You could lose one customer in five and break even, and most businesses lose far fewer.
- Raise prices for new customers first, then for existing ones with 30 days’ written notice.
- Give a plain reason (costs, demand, quality) without apologizing.
- Prefer a yearly increase to a big jump every few years.
- Offer a cheaper, smaller package rather than discounting the main one.
- Check gross margin a month later in your P&L.
Break-even and gross-margin basics are in How the money works.