Service businesses typically target margins of 50-75%, which is significantly higher than product businesses. The main cost is labor, so margins depend heavily on utilization rates and whether you use employees or subcontractors. High-expertise services like consulting can command even higher margins.

Include the direct labor cost (hourly rate times estimated hours), any subcontractor fees, tools or software used, travel expenses, and an allocation of your overhead. Many service businesses only count labor, which overstates margins by ignoring the overhead needed to support that labor.

Utilization rate — the percentage of paid time spent on billable work — is the single biggest driver of service margins. A team billing 70% of their time will have significantly higher margins than one billing 50%. Improving utilization even by 10% can transform profitability.