The three pricing models for service businesses
1. Cost-plus pricing
Add up your true cost to deliver the job — labor, parts, truck/travel, overhead share — then add a profit margin. Simple, protects against losses, but can undershoot market rates on high-demand services.
Formula: Price = (Labor + Materials + Overhead allocation) × (1 + Target margin)
Use the profit margin calculator to find the markup percentage you need to hit a target net margin after taxes and overhead.
2. Market-rate pricing
Research what competitors charge in your service area. Set your rate at market, at a premium if you have stronger reviews or faster response, or slightly below if you are building a client base.
The risk: market rates vary by neighborhood, season, and competitor quality. Check Angi, Thumbtack, and three competitor websites every six months.
3. Value-based pricing
Price based on the value the customer receives, not your cost. A refrigerator repair that saves a $2,000 appliance replacement is worth more than a $150 commodity rate suggests. Emergency rates, same-day service, and specialist expertise all justify a premium.
What your price must cover — the real cost list
- Direct labor — your hourly rate or the wage you pay a tech
- Parts and materials markup — typically 25–50% over cost
- Vehicle cost — IRS mileage rate (67 cents/mile in 2024) or actual lease + fuel + insurance
- Trip charge — the cost to show up before any work begins
- Overhead allocation — tools, insurance, licensing, phone, software, per job
- Sales and marketing cost — divide your monthly ad spend by jobs booked
- Non-billable time — calls, scheduling, driving between jobs, no-shows
Use the trip charge calculator to find a defensible trip fee that covers your vehicle and time cost before touching the job.
Setting your hourly rate
The formula most owners use is backwards: they look at what a competitor charges and match it. The correct direction is:
- Calculate your annual target income (what you need to live + invest in the business)
- Add overhead: insurance, tools, vehicle, software, marketing
- Estimate billable hours per year (200 working days × 5–6 billable hours = 1,000–1,200 hrs)
- Divide total cost + target income by billable hours = minimum hourly rate
- Add 15–25% for profit and risk buffer
Example: $80,000 target income + $30,000 overhead = $110,000 / 1,100 billable hours = $100/hr base. Add 20% buffer = $120/hr minimum viable rate.
Tiered pricing and packages
Tiered pricing (Good / Better / Best) increases average ticket because customers anchor to the middle option. Service businesses that offer a "basic + parts only" and a "full service + warranty" option consistently sell more of the middle tier than businesses that offer a single flat rate.
Structure each tier to include something the next tier down does not:
- Basic: diagnosis + one repair item, 30-day parts warranty
- Standard: same-day diagnosis, repair + clean, 90-day labor warranty
- Premium: priority scheduling, full diagnostic, parts + labor warranty, one follow-up call
When to raise prices
- You are booked more than 2 weeks out consistently
- Your close rate on quotes exceeds 85% (you are too cheap)
- Material costs have increased more than 10%
- You have added certifications, equipment, or team capacity
- Competitors in your area have raised rates
Raise rates for new customers first. Notify existing customers 30 days in advance.
Calculate your break-even rate
The free break-even calculator shows exactly how many jobs per month you need at different price points to cover costs.