How to Price a Service: Three Methods and a Worksheet for a Small Business

An air-conditioning technician charges 75,000 for a service call because that is what the others in the area charge. He works six days a week and at the end of the month has little left. He has never worked out what an hour of his time costs once the motorcycle, the tools, the refrigerant, the phone, the helper's wages and the travel between jobs are counted. If he did, he would find that at four jobs a day he is roughly breaking even. Knowing how to price a service starts with a number most owners have never calculated.

Why services are hard to price

• There is no shelf cost. A product has a purchase price. A service has time, and time feels free.
• Capacity is limited. You can sell only so many hours.
• Much of the time is not billable. Travel, quoting, waiting, admin.
• Customers cannot see the cost, so they compare the only thing visible: the price.

Method 1: cost-plus, from your real hourly cost

This gives your floor. It answers: below what price do I lose money?

Step 1: total annual cost

Everything the business spends in a year.

• Your own pay. What you need to live on, as a salary. A business that does not pay its owner is not profitable.
• Staff wages and their statutory costs.
• Rent, utilities, phone, internet.
• Vehicle: fuel, maintenance, depreciation.
• Tools and equipment, spread over their useful life.
• Insurance, licences, software, accounting.
• Marketing.
• Taxes on the business.
• An allowance for slow months, breakdowns and bad debts.

Step 2: billable hours

Not the hours you work. The hours a customer pays for.

Start from working hours a year and subtract:

• Holidays, leave and sick days.
• Travel between jobs.
• Quoting, calls, messages.
• Buying materials.
• Administration.
• Idle time with no bookings.

For many small service businesses, billable time is around half of working time, sometimes less. Measure yours for two weeks.

Step 3: cost per billable hour

Total annual cost divided by billable hours.

A worked example

A two-person AC service team, owner and helper.

Working time: 300 days at 8 hours is 2,400 hours. Billable share, measured: 50 percent, so 1,200 hours.

Cost per billable hour: 200,000,000 divided by 1,200, about 167,000.

A standard service that takes one hour on site therefore costs the business about 167,000 before any materials and before any profit. Charging 75,000 was never going to work.

Step 4: add profit and materials

• Profit margin. The amount that lets the business grow, replace equipment and survive a bad year. Add 15 to 30 percent to cost as a starting point.
• Materials, at cost plus a handling margin.

Price for a one-hour service: 167,000 plus 20 percent is about 200,000, plus materials.

This number is a floor and a reality check. It is not yet the price.

Method 2: market comparison

Now look outward. What do customers already pay?

• Collect prices from five to ten competitors for the same job.
• Compare like with like. What is included? A guarantee? Same-day response? Original parts? Cleaning up afterwards?
• Find the range: the cheap end, the middle, the premium end.
• Place yourself deliberately. Where do you want to sit, and what justifies it?

If the market's middle is below your cost-plus floor, you have three choices:

1. Reduce cost: less travel through tighter scheduling, more billable hours.
2. Move up: serve the customers who pay for reliability, speed or quality, and show why you are worth it.
3. Do not sell that service. Some services are not profitable for a business of your structure.

What you cannot do is price at the market and ignore the floor.

Method 3: value to the customer

For some services, the price should follow what the result is worth, not the time it took.

• An emergency repair that gets a restaurant's cold room working on a Saturday night is worth far more than the two hours it took.
• A design or consultancy job that saves the client a large sum is worth a share of that saving.
• Specialist knowledge that took years to acquire is not priced by the minute it takes to apply.

Ask: what does the customer gain or avoid losing? Price a fraction of that, as long as it is above your floor.

Value pricing suits urgent, specialised or high-stakes work. For routine, comparable services, the market sets the ceiling.

Putting the three together

• Cost-plus sets the floor. Never below.
• The market sets the range for comparable work.
• Value sets the ceiling for work that is urgent, rare or high-impact.

Your price sits above the floor, placed within the market according to what you offer, and higher still where the value is clear.

Hourly, fixed or packaged

Hourly rate.

• Fair when scope is uncertain.
• Customers dislike the open-ended total.
• You earn no more for being fast.

Fixed price per job.

• Customers like certainty.
• You keep the gain from efficiency.
• You carry the risk of underestimating. Define what is included and what counts as an extra.

Packages and contracts.

• A maintenance contract with scheduled visits: predictable income for you, convenience for the customer.
• Prepaid bundles: five visits at a lower price per visit.

For standard jobs, use a fixed price. For the unexpected, quote an hourly rate for extras, agreed before the extra work starts.

Offer three levels

Presenting one price invites a yes or no. Presenting three invites a choice among them.

• Most customers choose the middle.
• The premium option makes the middle look reasonable, and some will take it.
• The basic option gives the price-sensitive customer a way to say yes.
• All three must be above your floor.

Charge for what costs you

Several costs are real and often given away.

• Call-out or travel fee, especially beyond a set distance.
• Minimum charge. A ten-minute job still took an hour of your day.
• After-hours and urgent rates.
• Diagnosis fee, credited against the repair if the customer proceeds.
• Materials at a margin.
• Revisions beyond an agreed number, in design and similar work.

State them in advance. Charges announced before the job are accepted. The same charges appearing on the bill are resented.

Presenting the price

• Say what is included, specifically. "Cleaning of indoor and outdoor units, pressure check, 30-day warranty."
• State the result, not only the task. "Cold air restored, and it should stay that way through the dry season."
• Give the price plainly, without apology.
• Offer the choice of levels.
• Mention what is not included, so there is no surprise.

Avoid the bare number. A figure with nothing around it can only be compared with a lower figure.

Raise prices as costs rise

Recalculate your hourly cost once a year. Fuel, wages and parts move. A price unchanged for four years has become a discount.

Small, regular increases are easier for customers than a large jump. Give notice to regular customers and explain briefly.

Know your numbers afterwards

• Billable hours per week, against the assumption in your calculation.
• Average revenue per job.
• Time per job type. If a "one-hour" service really takes ninety minutes with travel, the price is wrong.
• Jobs won and lost on price.
• Profit per month.

If you are fully booked and still short of money, your price is too low. If you are winning every quotation without a murmur, it is probably too low as well.

Common mistakes

• Copying a competitor's price without knowing your own cost.
• Not paying yourself in the calculation.
• Dividing by working hours instead of billable hours.
• Forgetting travel time.
• No minimum charge.
• One price, no options.
• Giving away diagnosis, travel and urgency.
• Never raising prices.
• Discounting to win, below the floor.

Tools

The calculation needs your annual costs and your real billable time. Costs come from your books. Billable time comes from recording jobs with their durations. In Polynusa, expenses and invoices are recorded in the bookkeeping, and jobs and quotations sit with the customer, so the figures behind a price can be checked against what actually happened. See the pricing page.

Summary

Work out your cost per billable hour: all annual costs including your own pay, divided by the hours customers actually pay for. Add a margin for the floor. Compare with the market on a like-for-like basis and decide where you sit. Price above that where the value to the customer is high. Use fixed prices for standard jobs, offer three levels, charge openly for travel, minimums and urgency, and recalculate every year.

FAQ

How do I calculate the cost of an hour of service?

Add up everything the business spends in a year, including the owner's own pay, and divide by the hours you can actually bill, not the hours you work. Billable hours are usually far fewer than working hours once travel, quoting, administration and idle time are removed. That cost per billable hour is your floor.

Should a service be priced by the hour or by the job?

By the job where you can estimate the work with confidence, because customers prefer a known total and you are rewarded for becoming faster. By the hour where the scope is unclear or likely to change, so the risk of extra work is not yours alone. Many businesses use a fixed price for standard jobs and hourly rates for extras.

What if competitors charge less than my calculated price?

First check that you are comparing the same thing: scope, quality, guarantee, response time. If you truly cost more, either reduce cost, serve customers who value what makes you different, or accept that this particular service cannot be profitable for you at market price. Pricing below your own cost to match a competitor only loses money faster.