To price for profit, work backwards from the profit the business needs rather than forwards from what it costs you to deliver. Costs give you the floor. Then run one piece of arithmetic before you do anything else: what a 10 per cent price rise does to your net profit, and how many clients you could lose at the higher price and still be exactly as profitable.
A price increase goes straight to the bottom line, while a revenue increase brings costs, capacity pressure and more of your time with it. Owners often underprice because they are nervous about losing work, being seen as expensive, or having a conversation they would rather avoid.
Why is cost-plus only a floor?
Starting with your costs and adding a margin tells you the point below which you should not go. To set the price, ask what the work is worth to the client, which is often a very different number.
Clients buy an outcome: a problem avoided, a decision made properly, a job finished on time. The price of that outcome has little to do with how long it took you.
What does a 10 per cent price move do?
These figures are illustrative; run the same sums on 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.
Then ask: 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. In this example 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 is the arithmetic behind the dangers of discounting. You can run these numbers on your own business with our profit improvement calculator.
What does underpricing cost you?
The obvious cost is margin: lower prices mean more volume for the same profit, which puts pressure on capacity, quality and you.
Low prices also attract price-sensitive clients, who tend to query invoices, move as soon as someone cheaper appears, and take up time out of proportion to what they pay. They then fill the capacity you need for better work.
How do you set a profitable price?
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 often well above the floor. Write the value case in one paragraph before you quote, so you can make it to a client without discounting at the first hesitation.
How do you raise 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, because a long justification invites negotiation.
Some clients may leave, often those who were there for the price. Use the arithmetic above to see how many departures you can absorb.
To test where your prices sit, raise them on new business first. 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. State your price covers how to say the number without softening it, and our guide to owner confidence covers the confidence side.
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.
- Identify the bottom tenth 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.
Questions to answer
- When did you last raise prices, and what happened?
- Out of ten, 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?
Pricing sits at the centre of business coaching. Where the margin problem runs deeper than the price list, our guide to improving margins takes it further, and the monthly business review is what stops the drift returning.
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Frequently asked questions
My market is price-sensitive and competitive — does this still apply?
Some markets are, and there the answer is often to change what you sell. Owners can also mistake their market for price-sensitive because they mostly hear from clients who chose on price. Before accepting it as fact, find out what your competitors charge rather than what you assume they charge, and ask three recent clients why they picked you. Then test a higher price on the next few new enquiries, where the risk is lowest, and record how many accept. That gives you evidence about your own market rather than an assumption.
Should I put prices up for everyone at once?
Often not. Apply the new price to new enquiries immediately, because that costs you nothing and tells you within weeks how the market responds. Then move existing clients in waves, starting with the least profitable — you learn from the first wave and the risk stays contained. An across-the-board increase on the same day makes every client's conversation happen at once, which is the version most likely to produce a bad week and a hasty reversal. The exception is a formal annual uplift written into your terms, which is simpler to apply to everyone on the same date.
What about long-standing clients who have never had an increase?
They are often among your least profitable accounts. Your costs have risen every year since that price was set and both of you know it. Give proper notice, state the new figure and the date, and keep the explanation to one line, because long justifications invite negotiation. If the relationship cannot carry a rise after several years of none, the account has been subsidised by your other clients. Start with the least profitable of them, and decide in advance what you will do if they decline.
How often should prices change?
Review annually and change whenever the review says it is justified. Put the date in the diary so it becomes a routine rather than an event you have to work yourself up to. Without reviews you face one large increase every five years instead of a small one each year, and the large version is more likely to lose clients. A review commits you to knowing where you stand, not to raising prices. Write down the result of each review, including a decision to hold.
What if I raise prices and lose more clients than the arithmetic allowed for?
First check what you lost. The break-even number is measured in gross profit, not client count, so losing six of your smallest accounts is not the same event as losing two of your largest. Rank the departures by gross profit before you conclude anything. If the loss is real, you have learned something specific and recoverable: the increase was too large in one step, or it landed without a value case, or that segment will not pay it. None of those require going back to the old price for everyone. Hold the new price for new enquiries, where the feedback is cheapest, and where a client relationship is worth keeping, negotiate the scope rather than the number.