What is a good profit margin for a service business?

It depends entirely on your fixed costs and volume, which is why a benchmark figure is a poor guide. The useful test is whether your margin multiplied by realistic volume covers your fixed costs with something left over — that is answerable with your own numbers in a few minutes.

How do I price for a 40% margin?

Divide your cost by 0.6. Multiplying by 1.4 gives a forty percent markup, which is only a 28.6% margin — the same arithmetic slip that leaves money on every unit sold.

Should I include my own time in the cost?

Yes, at a rate you would pay someone else to do it. A price that treats the owner's labour as free produces a business that cannot afford to replace the owner, which is a business that cannot be stepped away from or sold.

What Margin Should I Charge? Pricing a Service Business

There is no universal right margin, but there is a wrong way to work one out — confusing margin with markup, and pricing from cost rather than from what the business needs to cover. Here is how to set a price that pays for the whole business rather than just the job.

Margin and markup are not the same number

Margin is profit as a share of the price. Markup is the same profit as a share of the cost. A fifty percent markup is a thirty-three percent margin, and treating them as interchangeable is the most expensive arithmetic error in small business pricing.

The mistake has a direction: pricing for a target margin by adding that percentage to cost always underprices. To hit a forty percent margin you divide the cost by 0.6, not multiply by 1.4 — and on a sixty dollar cost that is the difference between a hundred dollars and eighty-four.

Price the business, not the job

A price that covers the cost of doing the work leaves the business unpaid. Rent, insurance, software, and the hours spent quoting jobs you did not win are all real, and none of them appear on any individual job.

So the margin has to cover the job's own costs, a share of the overhead, and profit on top. A useful test: multiply your intended margin by the volume you actually expect, and see whether it covers the fixed costs. If it does not, the margin is too low regardless of what competitors charge.

What competitors' prices actually tell you

Less than it appears. You cannot see their cost base, their volume, or whether they are pricing sustainably — and a competitor quietly going out of business is not a benchmark.

Their prices bound what the market will bear, which is genuinely useful. They cannot tell you what your business needs, which is the question a margin answers.

Common questions

What is a good profit margin for a service business?: It depends entirely on your fixed costs and volume, which is why a benchmark figure is a poor guide. The useful test is whether your margin multiplied by realistic volume covers your fixed costs with something left over — that is answerable with your own numbers in a few minutes.
How do I price for a 40% margin?: Divide your cost by 0.6. Multiplying by 1.4 gives a forty percent markup, which is only a 28.6% margin — the same arithmetic slip that leaves money on every unit sold.
Should I include my own time in the cost?: Yes, at a rate you would pay someone else to do it. A price that treats the owner's labour as free produces a business that cannot afford to replace the owner, which is a business that cannot be stepped away from or sold.

Run it for your numbers:

Work out your price