The Power of Threes: A Simple Yet Strategic Pricing Model
In the world of small businesses and professional services, pricing can feel like both an art and a science. While spreadsheets and cost models offer guidance, one timeless formula has stood out for its clarity and effectiveness: pricing where 1/3 covers direct costs, 1/3 covers overhead, and 1/3 is pure profit.
Aaron Thomas
7/18/20251 min read
If your gross margin is greater than 66% and your profit margin is more than 33%, congratulations you have achieved success.
For everyone else here is the model to grow a successful business. This model divides your final price/revenue into equal thirds:
• Direct Costs (1/3)
These are the expenses directly tied to delivering the service or product. Think: materials, subcontractors, labor, shipping, software licenses used per job, etc.
• Overhead (1/3)
These are your “keeping the lights on” costs—indirect expenses like rent, utilities, admin wages, insurance, marketing, equipment, and compliance fees. They’re real, recurring, and often underappreciated in pricing conversations.
• Profit (1/3)
NEVER EVER cut into your profit. This is your reward for risk, innovation, and effort. Profit funds growth, cushions downturns, fuels reinvestment, and reflects the value your business delivers.
But this isn't my industry average. Do you want to be average, or do you want to be above average? Do better than your competition. Build a budget which blueprints this formula. Measure monthly or by each project to ensure your actual results meet or exceed this formula. Keep a keen eye on expense as a percentage of revenue. If looks off. Fix it fast.