How to Set Your Rates for Next Year: The Pricing Math Service Business Owners Usually Skip

Why gut-feel pricing falls apart

Setting your rates for next year by looking at what competitors charge, or by picking a number that felt right a few years ago and leaving it alone, works fine until it doesn't. The problem is that costs move steadily upward while rates tend to stay put. By the time you notice, you can be a year or two behind.

Two businesses in the same area doing the same work can have completely different cost structures. The one with a newer truck, higher insurance premiums, or more equipment to maintain needs to charge more just to end up in the same place as a leaner operation. The market rate tells you what people are willing to pay. It does not tell you whether that rate is actually working for your business.

There is also the problem that some of the most confident-sounding rates in any trade come from operators who are not running the numbers. They sound assured. They are not making money. Knowing what you need to charge starts with your own numbers, not anyone else's.

The rate calculation in five steps

The rate-setting exercise comes down to one equation: revenue needed divided by billable hours equals your minimum rate. Finding the revenue you need requires two inputs, your target earnings and your overhead. Finding your billable hours requires one honest estimate. Here is how to do each one.

Write down your target owner earnings. This is what you want to take home after the business pays its bills. Not revenue. Not what you billed last year. The actual number you want to clear as the owner.

Estimate your working weeks. Subtract vacation time, slow weeks in the off-season where you plan to step back, any weeks set aside for equipment maintenance. Multiply the remainder by your average working hours per week.

Apply a billable fraction. For most solo service operators, somewhere between 55 and 70 percent of working time actually gets charged to a customer. The rest is drive time, admin, quoting, waiting on access, and weather. Use your honest sense of your own situation.

List all annual overhead. Vehicle payments, fuel, insurance, tools, software, phone, equipment maintenance, anything the business pays to operate. Add it up.

Do the math. Add target earnings to total overhead. That is the revenue the business needs. Divide by annual billable hours (working weeks times weekly hours times billable fraction). Round the result up to a clean number. That is your rate floor.

The billable hour gap

The single biggest mistake in rate-setting is treating billable hours and working hours as the same thing. For a solo operator, they almost never are. Drive time between jobs, writing up quotes, ordering parts, following up on invoices, waiting on a customer who runs late: none of those hours get billed. For many one-person service businesses, that gap is 30 to 40 percent of the working week.

If you work a 44-hour week but realistically bill 28 of those hours, your billable fraction is about 64 percent. If you set your rate assuming 44 billable hours but are actually billing 28, you need a rate roughly 57 percent higher than a fully-booked operator to hit the same income. That math does not show up as one bad day. It shows up as the feeling that you are always busy but never quite where you expected to be financially.

Some of the gap is recoverable through better routing or batching similar jobs by area. But some of it is just the reality of running a small service business without a dispatcher. The right response is not to pretend the unbillable hours do not exist. It is to build them into the rate so the business earns enough from the hours that do get billed.

A worked example

Here is how the numbers connect for a solo pool service operator. These figures are illustrative, not industry averages.

Target owner earnings: $68,000 a year.

Working schedule: 47 weeks (four weeks personal time, one week for a truck service and equipment check in the off-season). Average hours per working week: 40. Estimated billable fraction based on route density and admin time: 62 percent.

Annual billable hours: 47 times 40 times 0.62 equals approximately 1,165 hours.

Annual overhead for this example: vehicle note and insurance $7,900, fuel $4,200, liability insurance $2,100, chemicals and equipment not charged back per job $1,800, phone and software $900. Total: $16,900.

Revenue needed: $68,000 plus $16,900 equals $84,900.

Rate: $84,900 divided by 1,165 hours equals $72.87 per hour. Round up to $75.

This pool tech had been charging $65 per hour for two years. At $65 with these hours, the business was generating about $75,700 in revenue and clearing around $58,800 after overhead. Not disastrous, but about $9,200 short of the income target. And getting shorter every year as costs moved and the rate stood still.

At $75 an hour and the same hours, the business produces about $87,375 in revenue and clears about $70,475 after overhead. Roughly $2,500 above the target, which provides a small cushion for weeks that run short.

What to do if your number feels too high

If your calculated rate is noticeably above what your local market charges for similar work, the exercise is still valuable. It tells you exactly where the gap comes from, and that lets you evaluate the realistic options.

One option is to look at overhead. Go through the list and identify any costs that could come down without hurting the quality of the work. Subscriptions and software are worth checking. Some supply costs have alternatives. Vehicle costs are mostly fixed, but if the truck is newer than the work requires, that is worth knowing when the next purchase decision comes up.

A second option is to improve your billable fraction. If a lot of your unbillable time is drive time between scattered jobs, tighter routing by neighborhood or zip code can recover some of it. More billable hours from the same working day means the same rate produces more revenue.

A third option is to revisit the earnings target. If the market in your area genuinely cannot support the rate you calculated, you may need to either adjust what you want to clear or change the scale or structure of the business. That is not a comfortable conclusion, but it is better to know in November than to find out in June.

Check with your accountant before making structural changes to how you bill or what you count as overhead. The rate math is yours to run.

Run it every November

November is the right time to run this exercise, before your spring booking window opens and before anyone has been quoted a spring rate. If the math shows you need a rate increase, you have time to communicate it now with five or six weeks of notice. A price change announced in November lands as a planned annual update. The same change dropped in February, right when you are quoting spring work, lands as a surprise.

Running the numbers once a year also catches the drift before it compounds. A $5 gap in year one is a $10 gap in year two and a $15 gap in year three if costs keep moving and the rate does not. The owners who catch this in year one adjust once and move on. The ones who catch it in year three have a bigger announcement to make and a harder conversation with longer-term customers.

Set a time each November to do this. Put together your costs for the year, run the formula, land on a specific number. It takes two to three hours the first time and less than an hour once you know the drill. The rate you set from your own numbers, not from feel and not from what someone else charges, is the one you can defend when a customer pushes back.