Pricing Your Services for Profitability
Pricing is the highest-leverage lever in a service business. A 10% price increase, held constant, often adds 30–50% to net income. Here's the framework.
Start with your fully-loaded cost
Labor cost per hour: wage + payroll tax + benefits + workers' comp + overhead allocation.
For a $60/hr employee, fully-loaded cost is often $85–$95/hr once everything is included.
Bill rate must cover this cost plus overhead margin plus profit margin — or you're subsidizing customers with your equity.
Target utilization matters
You can't bill 40 hours a week even if you work 40 hours a week. Realistic billable utilization is 60–75% for most service businesses.
If your target is $150k profit and realistic billable hours are 1,400 a year, you need $107/hr in gross profit per billable hour — before overhead.
Cost-plus vs value-based pricing
Cost-plus: labor cost × markup. Simple, but leaves value on the table for high-value work.
Value-based: price based on the customer's ROI or the alternative cost of not getting the work done.
Most mature service firms move from cost-plus toward value-based over time.
Common underpricing patterns
Charging the same rate to a Fortune 500 client and a five-person startup.
Discounting to win work without also reducing scope.
Not raising rates annually for existing clients.
Not charging for change orders on fixed-fee work.
Bundling everything into one flat fee that becomes unprofitable when scope creeps.
How to raise prices without losing clients
Announce with 60+ days notice.
Grandfather existing clients for one cycle if needed, then move them to new rates.
Tie the increase to concrete value delivered: 'Over the last 12 months we saved you $X, and here's what's included in our updated service.'
Expect to lose 5–10% of clients. If you lose more, the increase was too big or communicated poorly. If you lose zero, it was probably too small.
A quick disclaimer
This article is general information for Montana small business owners, not tax, legal, or accounting advice for your specific situation. Rules change, and how they apply depends on facts we don't know about you. Before acting on anything you read here, talk to a qualified professional. If you're a Montana business owner and want a real conversation about your books, payroll, or tax, that's what Marlow Accounting is here for — call 406-290-1214 or schedule a discovery call.