How to Price Your Services for Profit (Not Just Revenue)

August 10th, 2025

You’ve probably heard the age-old pricing strategy advice: “Charge what you’re worth.”

It’s good advice … but it’s not complete advice.

If you’re a contractor or service provider and you actually want to cover your business costs while still putting food on the table, you need to charge more than what you’re worth. That is, you need to charge enough to turn a real profit.

Many service providers underprice themselves, sometimes intentionally and sometimes intentionally, but in both cases because they’ve only considered what clients might be willing to pay — and failed to consider their own expenses, taxes and how much money they need to keep from driving their business into the ground. The result? They may very well work long hours and book plenty of clients, and yet still struggle to make ends meet.

Your goal isn’t to make money — it’s to make enough money to keep on making money. And to drive a meaningful profit, your pricing strategy will need to factor in the various costs of doing business.

5 Steps for Improving Your Pricing Strategy

Step 1: Know Your True Costs

It’s easy to think of your costs as the obvious ones — materials, equipment, software, maybe a co-working space. But in reality, your true costs go much deeper.

When pricing your services, you need to factor in:

Direct costs: Expenses tied directly to delivering your work, such as materials or specialized tools.
Overhead costs: The costs of keeping your business running, such as office rent, utilities, internet, phone, insurance, computers, website hosting and software subscriptions.
Income taxes: While employers take federal, state and city income taxes out of W-2 employees’ paychecks, contractors are responsible for handling their own income taxes. These types of workers typically must do this via quarterly estimated tax payments.
Self-employment taxes: As a contractor, you’re also responsible for both the employer and employee portions of payroll taxes, which is currently a combined 15.3%. (FYI, that number consists of two taxes: 12.4% for Social Security and 2.9% for Medicare.) These taxes should also be accounted for in the quarterly estimated payments.
Health insurance and retirement savings: Unlike traditional employees, you must cover benefits such as medical, dental and vision insurance, as well as 401(k)s or similar retirement savings plans, entirely on your own.

If that sounds like a lot, it might be. But think about it: Everything on that list is exactly what every traditional employer tries to factor in when setting their costs.

Step 2: Don’t Forget About Your Time

Your billable hours are the ones you spend working directly for clients … but they’re not the only hours you work.

You also spend your time knocking out a number of support services that larger businesses have specific employees completing, such as marketing your services, responding to client emails, creating proposals and invoices, doing bookkeeping, maintaining your website and keeping up your social media account.

In other words, a 40-hour work week might only include 30 to 35 billable hours. (Or more realistically, given freelancers’ propensity to work salaried hours, a 50-hour work week might only include 40 to 45 billable hours.) But this means your hourly rate must be high enough to cover not just your billable work, but also the time spent running your business.

A simple way to calculate this is:

Decide how much you want to earn annually after expenses and taxes.
Estimate how many billable hours you can realistically work in a year.
Divide your desired annual income by your billable hours to find your base hourly rate.
Add in a buffer for unexpected downtime, slow seasons and emergencies that keep you from being able to work.

Step 3: Price for Profit, Not Just Breakeven

If you price your services solely based through the first two steps alone, you’re already ahead of many contractors.

Still, it’s not enough to simply cover your costs. If you’re running a business (and especially if you want to actually grow that business), you need to make a profit.

Some people hear “profit” and immediately think “greed.” It’s not. Profit is capital that allows you to expand your operations. It’s a resource that allows you to invest in better tools and training. It’s a cushion that allows you to weather slow months or unexpected events.

In short: Profits are the difference between a successful business and a failed one.

Profit Margins: There’s a Lot to Consider

Profit margins (the percentage of your revenues that remain after all costs are factored in) will differ from one business to the next. They’ll also be largely defined by the industry itself. A good example? Grocery stores are notoriously low-margin businesses, bringing in anywhere between 1% to 3%. If you started up a grocery store and tried to price in 25% to 30% margins, you would only be able to do so by either charging far more than your competitors or cutting out vital costs that would allow you to operate.

In many service-based businesses, anywhere between 20% to 40% is common. However, you’ll want to research your specific industry so you can make a more accurate calculation.

You might also consider “value-based pricing” for certain projects. In other words, rather than charging based on your time and materials, you charge based on the value you’re delivering to the client. For instance, fees for work that would save a client $50,000 a year might be larger than the fees you’d charge for work that would save a client just $5,000 a year.

Also, make sure to review your pricing at least once a year. A lot can change in that time. Inflation might bring up your costs. Your skills might improve and thus you drive more value. And your competitors might change rates.

Even Fat Profit Margins Won’t Stay Fat Forever

Lastly, understand that in many industries, margins tend to compress as sales expand.

Think about it. If you start a new business that grows to the point you need a second person, it’s likely that second person will be intimately involved in sales of that product. This means the employee will generate a lot of revenue to make up for their costs (salary, benefits, etc.). But the larger your business grows, the more you’ll need to hire people who only indirectly involved (or not involved at all) in generating revenue, such as human resources and accounting. You’ll also need to pay more rent, utility, technology and other costs to support those employees.

In short: Revenues per employee will decline, and overall expenses will grow, both of which will shrink your profit margins.

Step 4: Use Tools to Help You Price Correctly

If math isn’t your favorite part of freelancing, there are plenty of tools that can help you with steps 1-3:

Online rate calculators: Websites like YourRate.co can help you with some basic calculations around expenses, taxes and desired income.
Spreadsheets: A well-built spreadsheet can give you a clear breakdown of your costs, hours and profit margin.
Accounting software: Over time, software such as QuickBooks, FreshBooks or Wave can help you track income and expenses so you can adjust your pricing based on real numbers.

Step 5: Communicate Your Value

Of course, it’s one thing to know how much to charge — it’s another to sell clients on those costs.

This puts the impetus on you to clearly communicate things such as the problem you solve (and why it matters to them); your unique expertise (what sets you apart from competitors); and the results you’ve delivered (which you can do through testimonials, case studies or before-and-after examples).

The more a client believes they’ll get out of you, the less price becomes an obstacle.

Ready to Build a Profitable Pricing Strategy?

Pricing your services for profit isn’t just about covering today’s bills — it’s about building a business that can support you for the long term. Yes, if you’re already in business and your new pricing strategy results in raising rates, you very well might lose a few clients. But those who stay because they value your expertise and respect the sustainability of your business will finally be paying you what your work is truly worth.

Are you ready to move beyond guesswork and build a pricing model that truly supports your goals? The right financial partner can make all the difference.

McManamon & Co. is an accounting, tax, fraud, forensic and consulting firm that serves small and midsize businesses, including independent contractors. Our experienced accounting team can help you understand your costs, set profitable rates and plan for a sustainable future so you’re not just earning revenue, but keeping more of it as profit.

Call us at 440.892.8900 or contact us online today to learn how we can help you price your services with confidence.

Tags: accounting, financing, McManamon, McManamon & Co., small business, small business accounting, small business finances | Posted in McManamon & Co., small business, Small business finances