· Karson Lawrence · Finance · 7 min read
Pricing for Profit: How to Set Rates That Actually Make You Money
Most contractors price by gut feel or competitor matching. Both approaches leave money on the table. Here's a systematic approach to pricing that ensures profitability.
“What do you charge per hour?”
It’s a simple question. And if you answer with a simple number, you’re probably leaving thousands of dollars on the table every year.
Pricing is the biggest lever in your business. A 10% price increase on $1 million in revenue is $100,000 straight to your bottom line—with no additional work.
Yet most contractors set prices by:
- Checking what competitors charge (racing to the bottom)
- Using the same rates they’ve used for years (ignoring rising costs)
- Guessing (hoping it works out)
None of these approaches ensure profitability. Let me show you a better way.
The True Cost of Doing Business
Before setting prices, you must know your costs. All of them.
Direct Costs (Job-Level)
These costs vary with each job:
Labor (Example for $30/hr technician):
- Technician hourly wage: $30.00
- Payroll taxes (7.65%): $2.30
- Workers’ comp insurance: $4.50
- Health insurance (portion): $3.00
- Training time allocation: $1.20
- Paid time off allocation: $1.50
Total loaded labor rate: Often 30-50% higher than the wage
A tech making $30/hour might cost you $42-45/hour when fully loaded. If you price based on wage instead of loaded cost, you’re losing money on labor.
Materials:
- Actual cost of parts and supplies
- Markup target (typically 30-50%)
- Freight and shipping
Equipment:
- Consumables (refrigerant, solder, tape, etc.)
- Tool wear and replacement allocation
- Specialty equipment rental
Indirect Costs (Overhead)
These costs exist regardless of job volume:
Facility:
- Rent or mortgage
- Utilities
- Maintenance
- Property insurance
Vehicles:
- Payments or depreciation
- Fuel
- Maintenance
- Insurance
Administration:
- Office staff salaries
- Software subscriptions
- Phone and internet
- Professional services (accounting, legal)
- Marketing
Other:
- General liability insurance
- Professional licenses
- Association dues
- Bad debt (uncollected receivables)
Calculating Your Break-Even
Step 1: Total all overhead costs monthly
Example: $45,000/month in overhead
Step 2: Calculate billable hours per month
Example: 5 techs × 160 hours × 70% utilization = 560 billable hours
Step 3: Divide overhead by billable hours
Example: $45,000 ÷ 560 = $80.36 overhead cost per billable hour
Step 4: Add loaded labor cost
Example: $80.36 + $42 (loaded labor) = $122.36 per hour just to break even
The wake-up call: Many contractors charge $85-100/hour thinking they’re profitable. But after accounting for all costs, they’re losing money on every hour.
Pricing Models for Contractors
Model 1: Hourly (Time and Materials)
How it works: Charge by the hour plus materials markup.
Formula:
Hourly Rate = Break-Even Cost + Desired Profit Margin
If break-even is $122/hour and you want 20% profit:
$122 ÷ 0.80 = $152.50 minimum hourly rate
Pros:
- Simple to explain
- Adjusts naturally for complex jobs
- Lower risk on unknowns
Cons:
- Penalizes efficiency
- Customers hate uncertainty
- Hard to estimate final cost
Best for: Diagnostic calls, complex repairs, situations with unknowns
Model 2: Flat Rate (Menu Pricing)
How it works: Fixed prices for specific services regardless of time.
Formula:
Flat Rate = (Average Time × Hourly Rate) + Materials + Margin Buffer
If a water heater replacement averages 3 hours at $150/hour + $400 materials + 15% buffer:
(3 × $150) + $400 + 15% = $862.50 → Price at $895
Pros:
- Customers know cost upfront
- Rewards efficiency
- Easier to sell
- Predictable revenue
Cons:
- Requires accurate time data
- Can lose money on complex installs
- Need to update regularly
Best for: Common repairs, equipment replacement, routine services
Model 3: Value-Based Pricing
How it works: Price based on value delivered, not cost or time.
Example: Emergency service on a Friday night.
Cost-based thinking: “It’s 3 hours of work = $450”
Value-based thinking: “Without AC this weekend, they’ll be miserable for 3 days. What’s relief worth? = $850”
Pros:
- Captures true value
- Higher margins on high-value situations
- Reflects urgency and expertise
Cons:
- Requires confidence
- Need to read situations
- Can feel uncomfortable
Best for: Emergency services, peak seasons, specialized expertise
Model 4: Tiered Options (Good-Better-Best)
How it works: Present multiple options at different price points.
Example: Furnace Repair
- Good ($375): Fix the immediate problem
- Better ($575): Fix problem + address wear items + tune-up
- Best ($875): Complete service + extended warranty + priority scheduling
Pros:
- Customer controls spending
- Average ticket increases (most choose middle)
- Reduces price objections
Cons:
- Requires training to present
- Need to define tiers clearly
- More complex to quote
Best for: Almost everything in residential service
The Pricing Review Process
Prices should never be static. Review quarterly:
Step 1: Cost Analysis
Have costs changed?
- Labor costs (raises, benefits, insurance)
- Material costs (supplier prices, fuel surcharges)
- Overhead changes (rent increases, new software)
Adjust break-even calculation accordingly.
Step 2: Margin Analysis
What are actual margins by service type?
- Pull job costing data
- Calculate actual gross margin per service category
- Identify services below target margin
Warning sign: If actual margins are consistently below target, prices are too low or costs are out of control.
Step 3: Market Analysis
What are competitors charging?
- Check their websites
- Get quotes as a “customer”
- Talk to customers about competitor pricing
The right response to competitor pricing: Know it, but don’t blindly follow it. Competitors might be unprofitable.
Step 4: Volume Analysis
Did price changes affect volume?
- Track close rates before and after changes
- Monitor customer feedback
- Watch for trends in lost estimates
Reality: A 10% price increase that causes 5% volume loss still increases profit.
Handling Price Objections
Higher prices mean more objections. Here’s how to handle them.
”That’s More Than I Expected”
Response: “I understand. Let me break down what’s included so you can see the value…”
Then walk through everything: labor, materials, warranty, expertise, service guarantee.
”Your Competitor Is Cheaper”
Response: “They might be. Can I ask what’s included in their quote?”
Often competitors quote less work or lower quality parts. Illuminate the difference.
”I Need to Think About It”
Response: “Of course. What questions can I answer that would help you decide?”
Objections usually mask unanswered questions. Find and address them.
”I Can’t Afford That”
Response: “I hear you. We have financing options that can make this more manageable. Would you like me to show you what the monthly payment would be?”
If you offer financing, use it. If you don’t, consider it.
When to Hold Price vs. Discount
Hold price when:
- You’re at capacity (don’t discount when you’re busy)
- Quality and service justify the premium
- The job is complex or risky
- It’s a new customer (don’t train them to expect discounts)
Consider discounting when:
- You need to fill slow periods
- It’s a long-term valuable relationship
- The customer is price-sensitive but high-volume
- You made a mistake that affected the customer
Never discount without a reason. If you discount because they asked, you’ve trained them to always ask.
Communicating Prices Confidently
Pricing psychology matters. How you present affects acceptance.
The Confident Delivery
Weak: “Um, so that would be… let me see… around $850, I think. Is that okay?”
Strong: “The investment for this repair is $850. That includes all parts, labor, and a two-year warranty. How would you like to proceed?”
Notice: “Investment” not “cost.” Warranty mentioned. Clear next step.
The Value Sandwich
Structure:
- Summarize what you found (build context)
- Explain the solution (build understanding)
- Present the price (with value framing)
- Offer options (give control)
- Ask for the decision (close)
Example: “Your compressor has failed, and unfortunately it’s not cost-effective to repair on a 15-year-old system. [Context]
I’d recommend replacing with a high-efficiency unit that will save you about $30/month on energy and come with a 10-year warranty. [Solution]
The investment is $5,400 for our standard efficiency option, or $6,200 for the high-efficiency unit with longer warranty. [Price with options]
Both include complete installation, permits, and system commissioning. Given the energy savings, most customers go with the high-efficiency. [Value]
Which option makes the most sense for your situation?” [Close]
Price Anchoring
Present higher-priced options first.
After seeing a $10,000 option, a $6,000 option feels reasonable.
After seeing a $6,000 option, a $10,000 option feels expensive.
Order your options: Best (highest) → Better → Good
Industry Benchmarks
While every business is different, here are healthy margin targets:
Gross Margin Targets by Service Type
- Service repairs: 55-65%
- Equipment replacement: 35-45%
- Maintenance: 50-60%
- New construction: 25-35%
Net Profit Targets
- Surviving: 5-8%
- Healthy: 10-15%
- Excellent: 15-20%+
Revenue per Tech Targets
- Service tech: $250-400K/year
- Install tech: $300-500K/year
If you’re significantly below these benchmarks, pricing is likely part of the problem.
The Pricing Mindset
All the formulas and strategies matter less than your mindset about pricing.
You Deserve to Be Profitable
Your expertise has value. Your reliability has value. Your guarantee has value. Price accordingly.
Cheap Customers Aren’t Good Customers
Customers who nickel-and-dime on price will nickel-and-dime on everything. They’re not worth the headache.
Price Is a Filter
Higher prices filter out price-shoppers and attract customers who value quality. That’s a feature, not a bug.
You Can Always Lower
If you price too high, you can discount. If you price too low, you can’t raise. Err on the side of higher.
The Right Price Is What the Market Bears
If customers are saying yes 90% of the time, you’re probably too cheap. Aim for 65-75% close rate.
The Bottom Line
Pricing isn’t magic. It’s math plus psychology plus confidence.
Know your costs. All of them.
Set prices that ensure profitability, not just competitiveness.
Present prices confidently, with value framing.
Review and adjust quarterly.
And remember: the contractor who competes on price wins the race to the bottom. Compete on value instead.
Need help analyzing your pricing strategy? Book a free 20-minute strategy call to discuss your specific situation.
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