Are Your Prices Stifling Your Growth?

For many commercial service business owners in Houston, the day-to-day reality is a constant hum of activity. The phones ring, proposals go out, and your teams are on the move, delivering marketing campaigns, IT solutions, or keeping commercial spaces pristine. You are busy. Yet at the end of the month, after reviewing the numbers, a frustrating question emerges. If we are this busy, why is there not more to show for it?

This feeling of spinning your wheels is common in the competitive Houston market. It often stems from a foundational issue that many business owners are hesitant to confront. They are competing on price without truly knowing what it costs to open their doors each day and deliver their service. This leads to a cycle of being overworked, underpaid, and stuck. Growth feels impossible because the resources to invest in that growth are being squeezed out by thin margins.

The path to sustainable growth is not paved with deeper discounts or simply working more hours. It is built on a clear, data-driven understanding of your business’s financial realities. It starts by answering one critical question: what does it actually cost you to deliver your service?

The Race to the Bottom

When you don’t have a firm grasp on your numbers, pricing becomes a reactive exercise. You might look at what a competitor charges and aim to be just a little lower. Or you might quote a price based on a gut feeling of what a client is willing to pay. While this can win you contracts in the short term, it is a dangerous long-term strategy.

Competing primarily on price positions your service as a commodity. The client’s decision becomes based on a single factor, the price tag. This devalues your expertise, your reliability, and the quality of your work. It also attracts clients who are loyal to the lowest bidder, not to your company. The moment someone else undercuts you, they are gone. This is a precarious position for any business that wants to build a stable future.

More importantly, it creates a ceiling for your profitability. When your margins are razor-thin, you have no buffer for unexpected costs, like a vehicle repair or a sudden increase in the cost of supplies. You also lack the capital to reinvest in your business through better equipment, employee training, or strategic marketing. You become trapped, unable to make the very investments that would allow you to charge more and attract better clients.

Calculating Your True Cost of Service Delivery

To set a price with confidence, you must first build it from the ground up. This means accounting for every expense that goes into your business, not just the obvious ones. Your true cost has three primary components.

1. Direct Costs

These are the expenses you can tie directly to a specific client or job. They are relatively easy to identify.

• Direct Labor: This is the wages you pay the employees who are actively performing the service. For an IT support company, it’s the technician’s hourly rate for the time they are on-site. For a commercial cleaning company, it’s the wages of the cleaning crew for the duration of their shift at a specific building.
• Direct Materials: These are the supplies consumed during service delivery. This could be cleaning chemicals, specialized software licenses purchased for a single marketing client, or parts used in a repair.

Most business owners have a decent handle on their direct costs. The calculation usually stops here, and this is where the problem begins.

2. Indirect Costs (Overhead)

This is the most frequently overlooked category. Indirect costs are all the expenses required to run your business that are not tied to a specific job. They are the cost of keeping the lights on. If you want a complete picture of your financial health, you must account for them.

Think about all the money you spend each month to simply operate:

• Rent for your office or warehouse space.
• Utilities like electricity, internet, and phone service.
• Insurance (liability, workers’ compensation).
• Salaries for administrative and sales staff who are not billable.
• Marketing and advertising expenses.
• Software subscriptions for accounting, CRM, or project management.
• Vehicle payments, fuel, and maintenance.
• Professional services like legal and accounting fees.

These costs are real. They must be paid every month whether you serve one client or one hundred. By ignoring them in your pricing, you are essentially providing your services at a loss without realizing it.

3. The Owner’s Time

The final component is the one business owners are most likely to undervalue: their own time spent on non-billable tasks. Every hour you spend writing proposals, answering emails, managing employees, or running payroll is time that contributes to the delivery of your service. It is a real and significant operational cost. Your business must compensate you for this administrative and management work, separate from any profit you hope to earn.

A Framework for Confident Pricing

Once you have a full list of your costs, you can move from guessing to calculating. The goal is to determine a billable rate that covers all your expenses and generates a healthy profit.

Step 1: Calculate Your Total Annual Overhead. Add up all your indirect costs for an entire year to get a comprehensive figure.

Step 2: Determine Your Total Annual Billable Hours. This is a crucial step. Do not simply multiply 40 hours a week by 52 weeks for each employee. You must be realistic. Account for paid time off, statutory holidays, training days, and internal meetings. A more realistic figure for a full-time employee might be around 1,700 to 1,800 billable hours per year, not 2,080.

Step 3: Find Your Overhead Cost Per Billable Hour. Divide your total annual overhead by your total annual billable hours.

Overhead Cost Per Hour=Total Annual Billable HoursTotal Annual Overhead​

This number represents how much it costs your business just to exist for every single hour an employee can bill to a client.

Step 4: Calculate Your Breakeven Cost Per Employee. For each service employee, add their direct hourly cost (wages plus payroll taxes and benefits) to the overhead cost per hour.

Breakeven Rate=Employee’s Direct Hourly Cost+Overhead Cost Per Hour

This is your breakeven point. It is the absolute minimum you must charge for that employee’s time to avoid losing money.

Step 5: Add Your Profit Margin. Price is not just about covering costs. It is about building a profitable company that can grow. Decide on a target profit margin. A healthy margin for service businesses is often between 20% and 40%, depending on the industry. This profit is what funds new hires, better equipment, and your own financial success.

Final Billable Rate=Breakeven Rate×(1+Desired Profit Margin)

This final figure is your data-driven, fully-loaded billable rate. It is a price you can stand behind with confidence because you know it ensures profitability and fuels the future of your business.

Overcoming the Fear of Raising Prices

Knowing your numbers is one thing. Acting on them is another. The fear of raising prices and losing clients is real, but it can be managed with a strategic approach.

First, shift your focus from explaining price to communicating value. Your service is not just a line item. It provides a result. Your IT support provides uptime and security. Your marketing provides leads and sales. Your cleaning service provides a healthy and professional environment. Your price reflects the value of that result, not just the time it takes to deliver it.

When you do decide to raise rates, consider a phased approach.

• Implement the new pricing immediately for all new clients. They have no prior benchmark for your rates.
• For existing clients, provide ample notice. A 60 or 90 day heads-up is professional and allows them to adjust their budgets.
• When you announce the change, frame it in terms of benefits to the client. For example, “This price adjustment will allow us to continue investing in the advanced training and technology we use to secure your network.”

You may lose a few clients. It is important to accept this possibility. However, the clients you lose are often those who were most focused on price, least loyal, and potentially the most demanding. Losing a low-margin client frees up your capacity to serve a new, more profitable one. This is not a step backward. It is a strategic move toward building a stronger client base and a healthier business.

Moving away from guesswork and toward a structured pricing strategy is an empowering act. It transforms you from a reactive price-taker into a confident business owner who understands the value you provide. Getting these foundational numbers right is the first step. It provides the clarity needed to build a more profitable and sustainable service business here in Houston. If you are struggling to find these figures in your own books, we can help bring them to light.