Boost Profits With Hormozi's New Pricing Rule

Key Takeaways

• Raise your prices until your profit margin covers your entire team's cost plus a 20 percent buffer for unexpected overhead.
• Document every service delivery step to prove to the IRS that your business expenses are necessary and ordinary for your specific trade.
• Switch from hourly billing to outcome-based pricing to capture the value of your speed rather than punishing yourself for efficiency.

Most small business owners are accidentally paying their customers for the privilege of working for them. This happens because they price based on what the guy down the street charges rather than looking at their own internal costs. Alex Hormozi recently highlighted this trap, noting that if you don't account for the 'tokens' or resources spent on every interaction, you're losing money before you even start the job. He said on X that while things might seem cheap, they actually cost you tokens every single time.

For a 12-person HVAC business or a local landscaping crew, these 'tokens' are your labor hours and equipment wear. If you spend $4,000 on payroll each week but only bill $4,500, you aren't making a $500 profit. You're likely losing money once you factor in the self-employment tax and the cost of maintaining your fleet. Small operators often forget that the Internal Revenue Service (IRS) expects you to run a for-profit enterprise, and thin margins make you vulnerable to audits if your business looks like a hobby due to constant losses. You can read about how the IRS distinguishes between a business and a hobby on their official site.

Stop Trading Minutes for Pennies

Hourly billing is a trap for anyone who's actually good at their job. If an experienced plumber takes 15 minutes to fix a leak that takes a rookie three hours, the expert shouldn't be paid less. Hormozi's point about 'tokens' applies here perfectly. Every time you pick up the phone or send a tech to a site, you're spending a fixed amount of your company's life force. You need to price for the result, not the clock. A flat fee for a 'Leaking Pipe Solution' allows you to capture the value of your expertise and speed.

When you price for outcomes, your margins naturally expand as you get faster. This creates the cash flow needed to hire better people and buy better tools. It also simplifies your bookkeeping. Instead of tracking every minute, you track the completion of the project. If you're just starting out, the Small Business Administration (SBA) offers guides on basic business accounting to help you track these margins correctly. (Disclosure: we may earn a commission if you sign up for tools like Sage Business Cloud Accounting through our links.)

The Psychology of the Premium Price

Cheap customers are almost always the most difficult to manage. They demand the most time and complain the loudest because they're often stressed about their own finances. By raising your prices, you filter for customers who value quality and reliability. This doesn't mean you should be greedy. It means you should be sustainable. A business that can't afford to fix a mistake because the margins were too tight is a business that will eventually fail its customers.

(It's worth noting that higher prices also give you the room to offer better warranties or 'make it right' guarantees.) When you have a 40 percent margin instead of a 10 percent margin, a single botched job doesn't ruin your entire month. You have the breathing room to be the 'good guy' in your local market. This builds the word-of-mouth reputation that replaces the need for expensive Facebook ads or lead generation services.

Math for the Real World

To apply this, look at your last three months of bank statements. Total up every penny that went out the door for labor and software (plus materials). If your total revenue wasn't at least double that number, you're in the 'danger zone' Hormozi warns about. You're spending your tokens for a break-even result. You should aim for a gross margin that allows you to pay yourself a fair market wage while still leaving profit in the business for growth.

If you find your costs are too high, consider Auditing Your P&L to cut the fat before you hike prices. But for most service businesses, the problem isn't the spending, it's the fear of asking for what the service is actually worth. If you provide a service that saves a homeowner $5,000 in future repairs, charging $1,000 is a bargain, regardless of how many hours it took you to perform the work.

Review your current price list this Wednesday and raise your lowest-margin service by 15 percent immediately.

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📋 Disclaimer

This article is for informational purposes only and does not constitute legal, tax, financial, or professional advice. Laws and regulations change frequently, and the information presented may not reflect the most current legal developments. Always consult with a qualified professional (CPA, attorney, financial advisor) before making business decisions based on this content. MyBizNerd may receive compensation through affiliate links, but this never influences our recommendations.

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