The three numbers behind every price
Almost every pricing question comes down to three numbers, and most owners only ever look at one of them. There is the floor, which is what the work costs you to deliver. There is the ceiling, which is what your market will actually pay. And there is the number you pick between them, which is the only part that is a decision.
The mistake is starting at the ceiling. You look up a competitor, knock ten percent off, and call that your rate. Now your price is built on a number you did not calculate, set by someone whose costs, speed, and overhead you know nothing about. If they are wrong, you are wrong, and you find out slowly, over about a year, as you work more and keep less.
Start at the floor instead. The floor is arithmetic. Nobody can argue with it, including you at two in the morning when a customer is pushing back on an invoice. Once you know your floor, a discount conversation stops being about confidence and starts being about maths.
The ceiling still matters, because a price above what your market will pay does not become right just because you calculated it. But the ceiling is a constraint on the decision. It is not the basis for it.
Work out your cost floor before you look at anyone else
Your floor has three parts: what it costs to keep the business open whether or not you work, what it costs to do this specific job, and what you need to pay yourself.
Write out twelve months of fixed costs first. Insurance, licensing, vehicle payment and maintenance, phone, software subscriptions, accounting, bank and card fees, marketing, and the ones you always forget. Add them up honestly. Most owners undercount this by a third, because the annual charges do not feel like costs on the day they land. I listed the ones that hide best in where small businesses quietly leak money.
Then add what you need to take home before tax, and add a set-aside for tax on top of that. If your own pay is not inside the floor, you have designed a business that pays everybody except you. That is not a problem you can fix later with volume. It is baked into the first invoice and every invoice after it.
Now divide by billable hours, and this is where the number goes wrong for almost everyone. A full-time year is somewhere around two thousand working hours, but you will not bill two thousand. You are quoting, driving, buying materials, chasing money, fixing your website, and taking a week off. A solo operator who bills between a thousand and thirteen hundred hours in a year is doing well. Divide by the real number rather than the calendar number and your floor jumps by close to half. That gap is the single most common reason a busy business is broke.
How much should I charge per hour
Take what you need to gross for the year and divide it by the hours you can realistically bill. That is your floor rate. It is not your price. It is the number below which you are paying for the privilege of doing the work.
Say your fixed costs come to thirty thousand for the year, you need sixty thousand to live on, and you set aside fifteen thousand for tax. That is a hundred and five thousand you have to gross. If you bill eleven hundred hours, your floor is roughly ninety-five dollars an hour before you have added a single cent of profit or a single cent of materials. Those are illustrative figures, not a benchmark. Put your own in. If the answer surprises you, that is the point of doing it.
Then add margin, and be careful here, because margin and markup are not the same thing and the difference is real money. If you want a thirty-five percent margin you do not add thirty-five percent. You divide by 0.65. On a hundred dollars of cost, adding thirty-five percent gives you a hundred and thirty-five and a margin of about twenty-six percent. Dividing by 0.65 gives you a hundred and fifty-four, which is the margin you actually asked for.
Now your published rate is defensible. You know exactly what it covers, and you know exactly what a discount costs, because a discount comes out of margin rather than out of price. Ten percent off a job priced at a thirty-five percent margin does not cost you ten percent. It costs you close to a third of the profit on that job.
Why hourly pricing punishes you for getting faster
Here is the trap nobody warns you about. In your first year a job takes four hours. By year three you have done it three hundred times, you own the right tools, and you know the two things that always go wrong. Now it takes two hours. The customer got a better result, faster, from somebody who knows more. And you just halved your income on that job.
That is what an hourly rate does. It prices your inexperience and it penalises your competence. Every hour you save by getting better is an hour you no longer get paid for, so the only ways to earn more are to work slower or work longer. Neither of those is a business you want to be running in ten years.
Your customer did not buy hours. They bought a clean house, a working outlet, a set of photos, a filed return, a problem that stopped being their problem. Price the result and you get paid for skill. Price the hour and you get paid for time, which is the one input you cannot make more of.
Hourly still has a place, and it is a narrow one: work where the scope genuinely cannot be known up front, diagnostic work, and work where the customer controls how long it runs. The honest hybrid is a fixed price for a scope you have written down, plus an hourly rate for anything outside that scope, both stated before you start rather than discovered afterwards.
Building a fixed price you can defend
A fixed price is not a guess delivered confidently. It is an average with a buffer, and you get it by measuring.
Track your real times on the next ten jobs of the same type. Not your memory of them, the actual clock, door to door, including the drive, the cleanup, and the phone call afterwards. Then price off the slow end of that spread rather than the middle. If your ten jobs run between two and five hours, pricing off three and a half means every hard job eats the margin from an easy one, and hard jobs cluster.
Add the direct costs for that job: materials, fuel, disposal, any subcontractor, and the consumables you have stopped noticing. Add margin using the divide method rather than the add method. Then round up to a clean number, because 175 reads as a price and 168.50 reads as a calculation somebody is invited to argue with.
Then write the scope down in plain words, and write down what is not included. Nearly every fixed price disaster is a scope disaster wearing a pricing costume. The customer is usually not trying to get one over on you. They genuinely believed the gutters were part of it, because nobody ever said they were not.
The market rate check, and how to do it without copying
Now, and only now, look at what other people charge. You are not shopping for a number to copy. You are working out where your floor plus your margin sits relative to your market, so you can decide on purpose whether to sit above it or below it.
Ring three competitors as a customer with a specific, real job. Not 'what do you charge', which gets you a brochure answer. Give the actual details and ask what it would cost. Write down the number, and write down how they got to it: did they quote instantly, did they ask questions first, did they refuse to quote without seeing it. That tells you what your market has been trained to expect.
Then read the one-star reviews of the busiest company in your category. People tell you in detail exactly what they resented paying for, and that is a map of where price sensitivity actually lives, which is almost never where you assumed it was.
Then decide. Being the cheapest is a real strategy, but it only works on volume and systems, and one person cannot win on volume. Being the most expensive is also a real strategy, and it requires that you can point at something specific: faster response, a guarantee, proof of the work, somebody who picks up the phone. If you cannot name the reason you are expensive, you are not expensive. You are just overpriced.
What the trade-specific numbers actually tell you
The same method lands differently depending on what you sell, so here is how it plays out across the services people ask about most often.
For cleaning, price the visit rather than the hour, and use the first visit to measure. A first clean is always longer than the routine that follows it, so quote it separately and reprice properly at visit four, once you know the house. For handyman work, a minimum call-out charge is not greed, it is the arithmetic: a twenty minute job with a forty minute round trip is a ninety minute job, and the price has to say so out loud.
For detailing and pressure washing, price by the unit the customer already understands, which is vehicle size or square footage, and hold a surcharge for condition. The difference between a tidy car and a genuinely filthy one is not ten percent, it is double, and the person booking it knows which one they have. Lawns work the same way: price the property, not the hour, and walk it once before you commit to a recurring number you are stuck with all summer.
Photography, consulting, and bookkeeping are where hourly hurts most, because the customer is buying judgement and most of the value shows up in a small fraction of the time. Photographers should price the deliverable and the usage rights. Consultants should price the outcome and the access, and cap the access explicitly, so a retainer does not quietly turn into being on call. Bookkeepers should price a monthly amount off transaction volume and account count, then reprice every year, because a client's volume grows on its own and your fee never does.
If you are just starting, price low against your floor if you have to, but never below it. Under your floor you are not building a client base, you are buying customers with your own money, and the ones bought that way are the hardest to raise later. Pick the date of your first increase now and put it in your calendar before you take the first booking.
The calculator, in four lines
People search for a pricing calculator and get a form that asks two questions and returns a number with no reasoning attached to it. Here is the whole thing, and you can run it on the back of an invoice.
One: annual fixed costs, plus what you need to pay yourself, plus your tax set-aside. That is your required annual gross. Two: required annual gross divided by realistic billable hours. That is your floor rate. Three: job hours times floor rate, plus the direct costs of that job. That is your job cost. Four: job cost divided by one minus your target margin. That is your price.
For a delivery or mileage rate the unit changes and nothing else does. Your per-mile floor has to carry vehicle depreciation, tyres, maintenance, and insurance, not just what you paid at the pump, and it has to be figured across loaded and unloaded miles together, because you drive back empty and that trip is not free.
Run this once a year, and run it again any time your insurance, your vehicle, or your own pay changes. A price set in a year when your costs were different is not a price any more. It is a habit.
Raising your price on customers who already pay you
This is the part people search for last and need most. The arithmetic is easy. The phone call is not.
The fear is that everyone leaves. What actually happens is that a small number leave, and they are disproportionately the ones who took the most of your time, queried every invoice, and paid last. Losing them is not a cost you absorb. It is usually the first thing that gets better.
The method: give notice, name a date, give one sentence of reason, and then stop talking. Something like: from the first of next month my rate for this service is going to X, my costs have moved and so has what I am able to do for you, and your next invoice after that date will reflect it. Do not open with 'unfortunately'. Do not apologise. Do not stack up four justifications, because every extra reason you offer is another thing to argue with, and the more you explain the more it sounds like an opening position.
If you are nervous, do it in two steps. Put the new price in front of new customers first and run it for sixty days. Watch your close rate rather than your feelings. If the close rate barely moves, you were underpriced, and now you know it from evidence instead of hoping. Then move your existing customers across with a date.
One calibration to keep. If every single person says yes immediately and nobody ever pushes back, your price is too low. A healthy price collects the occasional complaint. Zero complaints means you left money on the table with every customer who would have happily paid more.
The price you charge is not the price you collect
You can get the number exactly right and still finish the year short, because pricing is only half of it. What matters is what you actually collect and how long it takes to arrive.
The usual leaks are unglamorous: work delivered that never got invoiced, add-ons done as a favour and never billed, invoices sitting unpaid because nobody followed up, and a discount you gave verbally once and then honoured forever. I went through the invoicing half of that in automating your invoices, and the fix is mostly that the chasing stops depending on you remembering.
Two habits close most of the gap. Take a deposit on anything with materials or a long lead time, and put your terms in writing where the customer sees them before the work rather than after. A deposit is not a statement about trust. It is how you stop financing other people's projects out of your own account.
And before you decide the answer to being underpaid is another pair of hands, work out what that costs first. I did the whole sum in what hiring an employee actually costs. If you want a second set of eyes on your own numbers, send me what you charge and what it costs you and I will tell you where the gap is.