Most service business owners set prices by looking at competitors, adding a small premium if they think they're better, and hoping the math works out. Then costs rise, they hold prices because they're afraid of losing customers, and six months later they're working harder for less money.
Pricing isn't a gut feel exercise. It's math. And the math has to start with the margin you need to hit, not the price you think the market will bear.
Start with your target margin, work backwards
If you need a 25% net margin to fund growth, pay yourself fairly, and build some cushion, that number drives everything else.
Say your fully-loaded cost to deliver a service is $7,500. That includes labor, materials, overhead allocation—everything. At a 25% margin, you need to charge $10,000. Not $9,500 because a competitor is at $9,200. Not $9,800 because you're nervous about the ask.
$10,000. That's the number.
If you can't get $10,000, you either need to cut delivery costs or accept that this particular service isn't worth offering at your required margin.
The cost increase trap
Here's where most owners get burned. Costs go up 10%, so they raise prices 10% and figure they're covered.
They're not.
If you're running a 25% margin and costs jump 10%, your $7,500 delivery cost becomes $8,250. A 10% price increase takes you from $10,000 to $11,000.
New margin: ($11,000 - $8,250) / $11,000 = 25%
Actually, that works in this case. But watch what happens at thinner margins.
At a 15% margin, your $8,500 cost becomes $9,350 after a 10% increase. A 10% price bump takes you to $11,000.
New margin: ($11,000 - $9,350) / $11,000 = 15%
Still fine. But here's the problem: most owners don't actually run these numbers. They estimate their costs, guess at the increase, and round down on the price bump because it feels safer. That's how 15% margins become 11% margins become "I don't understand why we're not making money."
Price for the cost environment you're entering, not the one you're leaving
Construction and manufacturing owners learned this the hard way in 2021-2022. Material costs moved 20-30% in months. The jobs they'd quoted at old prices ate their margins alive.
Build escalation into your pricing model. For project-based work, include material cost adjustment clauses. For recurring services, set annual price increase expectations upfront—don't surprise customers, but don't eat inflation either.
One contractor I work with now quotes projects with a simple line: "Material costs locked for 60 days from quote date. Projects starting after 60 days subject to material cost adjustment." His close rate didn't change. His margin protection improved dramatically.
Know your price elasticity before you need it
Some services have customers who will leave over a 5% increase. Others have customers who won't blink at 20%.
You need to know which one you have before costs force your hand.
The test is simple: raise prices on a small segment and measure the fallout. If you lose 5% of customers but increase revenue 12%, you should have raised prices a year ago. If you lose 25% of customers, you've found your ceiling.
Most owners never run this test because they're afraid of the answer. But knowing you have pricing power—or knowing you don't—changes every decision you make about growth, hiring, and investment.
Where to start
Pull your last 10 completed projects or service engagements. Calculate your actual fully-loaded cost for each one. Then calculate your actual margin.
If more than two of them came in below your target margin, you have a pricing problem, a cost problem, or both. The numbers will tell you which.
At Laverton Advisory, we build these margin models for clients so they can see exactly where their pricing breaks down—and fix it before it costs them another quarter of profit.
Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.