Price for Profit

Pricing is the highest-leverage decision in most small businesses and it gets less attention than almost anything else. A price increase goes straight to the bottom line. A revenue increase brings costs, capacity pressure and more of your time with it, and often delivers a fraction of the profit.

Most owners underprice. Not because they have run the numbers and concluded their prices are right, but because they are nervous about losing work, being seen as expensive, or having a conversation they would rather avoid.

Cost-plus gives you a floor, not a price

Starting with your costs and adding a margin tells you the point below which you should not go. It does not tell you what to charge. The question is not "what do I need to cover my costs?" but "what is this worth to the client?" Those are frequently very different numbers, and the gap between them is where your margin lives.

Clients are not buying your hours. They are buying an outcome — a problem avoided, a decision made properly, a job finished on time. The price of that outcome has very little to do with how long it took you, and pricing on input is the single most common way small businesses give away value they have already created.

A worked example: what 10 per cent actually does

Illustrative figures, and worth running with your own. A business turns over £480,000 across 100 jobs at £4,800 each. Direct costs are £2,880 a job, so £288,000 in total. Gross profit is £192,000. Overheads are £150,000. Net profit is £42,000.

Now put prices up 10 per cent, and assume every client stays:

• Price per job £5,280, revenue £528,000.
• Direct costs are unchanged at £288,000 — you are doing the same work.
• Gross profit £240,000. Overheads still £150,000.
• Net profit £90,000. It has more than doubled on a 10 per cent price move.

Now the more useful question — how many clients could you lose and still be no worse off? Gross profit per job rises from £1,920 to £2,400. To hold £192,000 of gross profit you need 80 jobs rather than 100. You could lose one client in five, be exactly as profitable, and do 20 per cent less work.

Run it the other way and the discounting habit looks different too. Drop prices 10 per cent and gross profit per job falls to £1,440. To stand still you now need 133 jobs instead of 100 — a third more work for the same profit, with a third more delivery risk, a third more admin and a third more of your time.

That arithmetic is why pricing is worth a day of your attention a year. Nothing else in a small business moves the number that far that fast.

The two costs of underpricing

The obvious one is margin: lower prices mean more volume for the same profit, which puts pressure on capacity, quality and you.

The less obvious one is who you attract. Cheap prices bring price-sensitive clients, and price-sensitive clients are the hardest to serve. They query every invoice, move as soon as someone cheaper appears, and take up disproportionate time relative to what they pay. Underpricing does not just cost you margin — it selects the clients who will make the rest of the business harder.

How to set a profitable price

Work backwards from profit, not forwards from cost. Decide the net profit the business needs to make. Add overheads. Add direct costs. Divide by the number of jobs or clients you can realistically deliver at a standard you would defend. That gives you a floor.

Then look at value. What does the client gain, avoid or save? What is the alternative costing them? What would they pay someone with a stronger reputation? The ceiling is usually well above the floor, and most small businesses are sitting close to the floor without ever having checked.

Raising prices without losing the business

Give reasonable notice — 30 days for ongoing work, longer for annual arrangements. Be clear and unapologetic. State the new price, the date it applies from, and one short line of explanation. Do not over-explain; length reads as guilt, and guilt invites negotiation.

Some clients will leave. Typically those who were only there for the price. A considered, well-communicated increase rarely produces the exodus owners fear, and the arithmetic above shows you can absorb a fair number of departures before you are worse off.

If you have no idea where your prices sit, the most reliable test is to raise them on new business first and watch what happens. If nobody hesitates, they were too low. If some push back and most accept, you have found the market. If you lose most enquiries, you have learned something specific and cheap about the segment you are serving.

The checklist

• Work out gross profit per job or per client. Revenue minus the costs that vary with the work. If you cannot, that is the first job.
• Run the 10 per cent model on your own numbers, both up and down.
• Calculate your break-even client loss. How many can you afford to lose after an increase before you are worse off?
• Rank clients by gross profit, not revenue. The list is usually not what you expect.
• Identify the bottom decile and decide: reprice, rescope or release.
• Set the floor from a target profit, not from costs plus a habit.
• Write the value case in one paragraph — what the client gains, avoids or saves.
• Apply new prices to new enquiries immediately. No notice period required, and it tells you the market answer within weeks.
• Diarise an annual pricing review so it stops being an event and becomes a routine.
• Stop discounting to close. Change the scope instead if you need to move the number.

The questions to sit with

• When did you last raise prices, and what actually happened?
• Out of 10, how confident are you saying your price out loud without adding a qualification?
• Which clients would you not take on again at the price they currently pay?
• If you were 20 per cent more expensive than you are today, what would have to be true about the business? What is stopping you making it true?

Common questions

My market is price-sensitive and competitive. Some genuinely are. Most owners believe theirs is because they have only ever heard from the clients who chose on price. Before accepting it as fact, check what your competitors actually charge rather than what you assume they charge.

Should I put prices up for everyone at once? Not usually. Apply the new price to new business, then move existing clients in waves, starting with the least profitable. You get information early and the risk stays contained.

What about long-standing clients who have never had an increase? They are usually the least profitable accounts you have, and the conversation is overdue rather than unreasonable. Costs have risen every year since you set that price and both of you know it.

How often should prices change? Review annually and change when it is justified. Businesses that never review end up with a large, difficult increase every five years instead of a small, unremarkable one each year.