Pricing Fundamentals - Key Elements for Profit
If you’re still guessing your prices, copying what your old boss charged, or “going with your gut” on quotes, you’re not alone – but you are rolling the dice with your profit.
This lesson (the first lesson in our 4-week Profitable Pricing Masterclass) walks you through the four core elements of pricing every trade business needs to understand:
Labour cost
Material cost
Markup
Efficiency
Once you’ve got these clear, you can start pricing like a business owner – not just someone trying to win the next job.
1. Labour Cost: What It Really Costs You to Be on the Tools
Labour cost is what it actually costs your business to put yourself or your team on-site to do the work.
That’s not just an hourly rate in your head – it includes things like:
Wages for your field staff
Superannuation
Any other on-costs directly tied to them working on the job
Most tradies never truly calculate this. Instead, they:
Copy their old boss’s rate
Match what someone else on Facebook says they charge
Look at a random “standard rate” in the local area
The problem? Your cost base is unique. Your vehicles, your insurances, your wages, your efficiency – they’re not the same as anyone else’s.
If you want to be profitable on purpose (not by accident), you need to know your real labour cost per hour, not just guess it.
This is exactly what the Profitable Pricing and Business Financials work is designed to help you do.
2. Material Cost: The Silent Profit Killer
Material cost sounds simple: it’s everything you buy to complete the job.
But here’s where most trade businesses leak profit:
Little items never make it onto the invoice
Staff forget to write things down
Extra fittings, fixings, or consumables are used on-site but never charged
Van stock is treated like “free” because it’s already there
Every time that happens, that material cost comes straight off your profit.
To tighten this up, you need:
A clear system so every material used is recorded
A way to make it easy for the team to capture what they used
Pricing and pre-builds that already include realistic material allowances and wastage
When you get this right, your material cost stops quietly eating your margin.
3. Markup: Where the Profit Actually Lives
Markup is where your profit is created – but only if you know your real costs first.
There are two types of markup you need to think about:
Markup on labour
Markup on materials
A lot of tradies are comfortable with markup on materials – they’ll do “hourly rate + materials + a bit on top”. That’s pretty standard.
The real danger zone is this:
Many businesses have a labour cost per hour that’s higher than what they’re charging out at.
Then they try to make all their profit out of material markup.
That means:
Labour is actually losing money
The only thing rescuing the job is material margin
If a job is labour heavy and material light, you can get smashed
The goal is:
Know your true cost per hour for labour
Add a proper markup on that (e.g. 20–30% or more, depending on your model)
Know your material markup structure and stick to it
When you’ve got this dialled in, you can look at a day and say:
“If I book out 8 billable hours at this rate with this margin, I know exactly how much profit I’ll make.”
That’s the shift from guessing to control.
4. Efficiency: The Lever That Multiplies Your Profit
Once your base pricing is right, efficiency is the lever that multiplies your results.
Think about this simple example:
You charge $150/hour
You quote 1 hour for a task
You complete it in 30 minutes
You’ve effectively hit 200% efficiency for that task. You charged for an hour, but did it in half the time. That means your effective rate on that job is $300/hour.
Same story with materials:
You quote $10,000 of materials with a 50% markup
The client pays $15,000
But because you’re efficient in ordering and usage, you only end up paying $5,000
Your profit on materials jumps from $5,000 to $10,000
That’s efficiency as leverage.
And here’s the key mindset shift:
You should be pricing so that an average tradie on your team can hit the time and material allowances and still be profitable.
Then:
You coach them to get faster and tighter
As efficiency improves, your profit margin grows
You can even build incentive programmes that share some of that win with them
You’re no longer scrambling or stressed that every little mistake is costing you thousands – because your pricing system is built to handle real-world performance and then improve from there.
5. Gross Profit vs Net Profit (Without the Jargon)
This bit confuses a lot of people, so let’s keep it simple.
Gross Profit = How Well You’re Doing on the Job
Gross profit is:
Income minus cost of sales.
Cost of sales includes things directly related to doing and delivering the work, like:
Field staff wages and super
Subcontractors
Hire equipment
Materials and anything you on-charge to the client
In short:
Gross profit tells you how well you’re charging, quoting, and performing on the tools.
If your gross profit is weak, you probably have an issue with:
Pricing
Cost control
Efficiency
Or a combination of the three
Net Profit = How Well the Business Is Actually Doing
Net profit is:
What’s left after all operational expenses.
Operational expenses include:
Office staff wages (and your own when you’re off the tools)
Rent, phones, internet
Memberships, software, insurance
Fuel, admin costs, etc.
Net profit is what really tells you:
“Is this business worth the effort? Is there actually money left at the end?”
Gross profit shows you how healthy your jobs are.
Net profit shows you how healthy your business is.
You need both.
6. Different Ways to Charge: Time & Materials, Fixed Price, and Shopping List Pricing
There are three main ways most trade businesses charge:
A) Time & Materials (Do and Charge)
This is the classic:
Hourly rate + materials + markup
Pros:
Simple to set up
Good for unpredictable or fault-finding work
Cons:
Customers compare your hourly rate with everyone else’s
“Why are you charging $120/hour? I only get paid $35/hour.”
Very little leverage – you can’t really get above 100% efficiency if you only bill for the time you’re physically there (unless you lie, which we don’t do)
Time & materials still has its place, especially for:
Fault-finding
Unpredictable service work
Some commercial/industrial jobs with long durations where efficiency is naturally high
But you don’t want it to be your only method.
B) Fixed Price
Fixed price is:
One total job price that covers all labour and materials.
You work out:
How long it should take
What materials you’ll need
Your desired margin
Then you present one number.
Pros:
Easier for clients to understand the final cost
You can build in margin and efficiency
Cons:
Clients still compare your total against someone else’s total
“These guys are $1,000 cheaper – we’ll go with them.”
You can win or lose big depending on how accurate your estimating is
Fixed price is powerful, but it still leaves room for “apples to apples” comparison.
C) Shopping List Pricing (Per Point)
This is where things get exciting.
Instead of thinking in hours and materials, you:
Turn each outcome into a productised line item.
Example:
A client doesn’t care about:
How many metres of cable you ran
How many junction boxes you installed
How many holes you drilled
They care that:
“I want a power point there.”
Shopping List Pricing packages:
The labour
The materials
The overheads
The profit
…into one price per outcome (per point).
Pros:
The client is choosing outcomes, not comparing hourly rates
You can build in realistic labour, material, and wastage allowances
Any efficiency you gain = more profit for you
Easier to train staff to follow a pricing system
This is the backbone of systems like the Shopping List Pricing System we talk about all the time in TSA.
7. Cost of Operations: Finding Your Real Charge-Out Rate
To price properly, you need to know:
What does it actually cost to run this business per hour of billable work?
That’s your Cost of Operations (Cost of Ops).
A simplified version looks like this:
Work out your average monthly operational expenses
Pull a 12-month P&L from Xero / MYOB
Make sure costs are in the right places (field wages as cost of sales, office wages as ops, etc.)
Add in monthly finance repayments
Vehicle finance
Any other financed equipment sitting on the balance sheet
Include all wages – including yours
Field staff
Office/admin
What you actually want to pay yourself (sensibly)
Add superannuation
On staff and on your wage target
Work out your total billable resources
Tradespeople
Apprentices (at a realistic utilisation – maybe 0.5 rather than 1.0)
Factor in real-world workdays
Public holidays
Annual leave
Sick leave
From there, you can calculate:
Average cost per billable hour for the business.
Then you can play with:
How many hours per week you’re currently actually billing
What happens to your cost per hour if you increase efficiency
What you must charge just to break even – and what you need to charge to hit a healthy profit
This is where most tradies get a rude shock:
They realise they’ve been charging less than it costs them to operate
Or they see how tight their margin really is once everything is included
But once you can see it, you can fix it.
8. Bringing It All Together
By the time you work through these fundamentals, you should:
Understand your real labour cost
Be tighter and more deliberate with material cost
Have a clear structure for markup on both labour and materials
See efficiency as a lever, not an accident
Know the difference between gross profit and net profit
Be clearer on when to use time & materials, fixed price, or shopping list pricing
Have a starting point for your Cost of Operations and charge-out rate
From here, the next step is to build your actual pricing system and plug these numbers into it, so you’re not just learning – you’re changing the way you quote, invoice, and make decisions.
