Price matters—to your customers and to your business’s longevity.
The problem is that setting the right price isn’t always straightforward. You might think going low will attract more customers, but there’s more to it.
This guide will demystify the elements of pricing. We’ll walk you through everything to consider, starting with the five factors of good pricing.
We’ll explore the basic fundamentals and the steps for conducting pricing analysis. We’ll also define common pricing strategies.
Finally, to get you started, we’ve got four tips that’ll help you make a business-boosting decision.
All good pricing strategies have a few things in common. Let’s explore.
1. Competitor Pricing
You should know how much your competitors charge. Why? Because if your services are priced way above theirs, you can’t blame your prospects for not choosing you.
Similarly, if your prices are much lower, prospects might second-guess your expertise. They might not trust the quality of your service. They might think: Where are you cutting corners?
2. Cost of Goods
A rock-solid pricing model does a lot of things, one of which is protecting your profit margin. We’ll take a close look at profit margins below. But for now, think of it as the cushion that keeps your business going.
How does this play into the cost of goods? Well, every project you complete costs money. You have to buy and use materials.
It’s absolutely essential that your pricing strategy covers these costs. Otherwise, you’ll end up out of pocket—or worse, funding projects out of your own paycheck.
3. Labor
Just like you need to cover the cost of goods, the same applies to labor. And yes, that includes your labor—not just your employees’.
If you don’t factor in the value of your own time, you’re not just undercharging—you’re working for free.
What do we mean by demand? Your services are in demand when people actively need and seek them out. This could be seasonal trends or a sudden shortage of skilled professionals in your field.
If demand is high, you have leverage. You can adjust pricing without scaring off potential clients. If demand is low, you might need to get strategic—offer bundled services or seasonal discounts, for example.
5. Perceived Value
According to Investopedia, “perceived value is customers’ evaluation of a product or service’s merits and its ability to meet their needs and expectations, especially compared with its peers.”
As you can probably deduce, a higher perceived value is what you’re shooting for. And when it comes to pricing, there are two ways you can go about this:
The first option is to price your service higherthan competitors. This can be a great choice if you’re able to communicate exactly why your offering is worth the extra cash. For example, you might throw in “complimentary” extras or have your work backed by a longer warranty. And as an interesting side note, “premium” prices for (perceived) higher-value services are often rounded up to the nearest whole dollar.
The second option is to price your service (slightly) lower than competitors. Let’s say you’re in the market for a new T-shirt. You have two very similar options: one is $9.99 and the other is $10. Many of us will go for the $9.99 shirt—we see the price as being closer to $9 and, therefore, a better deal. In reality, however, the difference is negligible—just 1 cent.
“The truth about pricing is: it isn’t about the number on a tag. Everything that happens before the price—the psychology and incorporating behavioral economics into the mix—matters much more than the price itself.”
3 Basic Elements of Pricing Every Contractor Should Know
Now, let’s take it back to basics. Here are three elements of pricing you should know about—and use in your strategy.
1. Cost
The cost is how much money your customers have to pay you for your service. It’s the dollar value.
Cost carries weight because it keeps your business financially feasible. It makes sure your operations are sustainable. And, it helps you earn a profit.
2. Margin
Completing a service costs you money.
You have to travel to the job site. You put your tools to work, which means they endure wear and tear. You buy materials to use, and you might even pay employees or subcontractors.
The cost of your services should cover all of the above. But that’s not all. It should also include a margin—an extra percentage that you take home as profit.
3. Markup
Markup is the amount you add on top of your costs to ensure a profit. It’s what allows you to turn a service into a sustainable business.
Let’s say a project costs you $500 in materials and labor. If you apply a 50% markup, you charge the client $750. That extra $250 is your gross profit.
Markup protects your earnings and absorbs unexpected costs. But, it’s not the same thing as your margin.
Markup is how much extra you charge on top of your costs to make a profit. It’s calculated based on cost.
Margin is how much profit you’re actually making from the final price you charge. It’s calculated based on revenue.
The right price isn’t just about what you want to charge—it’s about what people are willing and able to pay.
Can they afford your services? Do they value them enough to pay premium rates? Are you catering to a higher-income market, or is your audience looking for the best bargain?
3. Analyze Your Competitors’ Pricing
Your customers are comparing your prices to your competitors’—so you should be, too.
Staying competitive means keeping your services priced within the same ballpark.
To find out where you stand, check your competitors’ websites for pricing. If they don’t list it publicly, you may need to reach out for a quote.
4. Analyze Your Current Pricing Model
Is your pricing actually profitable? Is it sustainable long-term? Is it keeping up with rising costs?
If not, it might be time to rethink things. Consider adjusting your rates or adding value-driven upsells.
8 Common Pricing Strategies
What works for one business—even one service—might not quite fit another.
Below, we explore common pricing strategies. We’ll define each one and use an example to show how it works in practice.
1. Cost-Plus Pricing
Cost-plus pricing is as basic as it gets. You add up the cost of materials, labor, and overhead and then tack on a markup for profit.
Example: A contractor spends $15,000 on a kitchen remodel. They apply a 25% markup, bringing the final price to $18,750.
2. Competition-Based Pricing
This one’s about keeping up with the market. You check what competitors are charging and price your service accordingly.
Example: A contractor notices that local kitchen remodels range from $18,000 to $22,000. They set their price at $19,500—right in the middle.
3. Value-Based Pricing
Here, pricing is based on perceived value. If clients see your service as worth more, they’ll pay more.
Example: A contractor offers high-end finishes and a longer warranty. Their remodels cost $25,000 because clients believe they’re getting more—so they’re willing to pay more.
4. Dynamic Pricing
Prices shift based on demand, workload, or seasonality. When business is slow, prices drop. When demand spikes, prices go up.
Example: A contractor offers a 10% winter discount on kitchen remodels to keep crews busy. In peak summer, prices rise because demand is high.
5. Penetration Pricing
This is where you start low to attract customers, build a client base, and then raise prices once demand picks up.
Example: A new contractor offers 15% off kitchen remodels to land those first few clients and build word-of-mouth referrals. Once they’re booked solid, they switch to full pricing.
6. Skimming Pricing
This is the opposite of penetration pricing. You start high and then lower the price over time.
Example: A contractor launches a luxury kitchen remodel package with smart appliances and custom lighting at $35,000. As the novelty wears off, they drop the price to $30,000 to attract more buyers.
7. Psychological Pricing
A few small tweaks can make a price seem more attractive—even if the actual difference is tiny.
Example: Instead of charging $20,000 for a remodel, a contractor lists it at $19,995. That 5-dollar difference makes it feel like a better deal.
8. Premium Pricing
This is about positioning. You charge more by being the “luxury” option in the market.
Example: A contractor only works with top-quality materials and delivers white-glove service. Their kitchen remodels start at $40,000—clients pay more because they trust they’re getting the best.
4 Tips for Choosing a Pricing Model for Your Contractor Business
How do you know which pricing model is right for you?
What’s worked in the past? Look at how you’ve priced projects before. Was it profitable? Dig into why or why not.
Is your work steady or does demand fluctuate? You might need to use dynamic pricing. Another option is to charge extra year-round to cover slower periods.
Are you making a good profit? This is critical to keeping your business afloat long-term.
Have you recently conducted a pricing analysis? If not, now’s a good time to do just that.
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