A small change in price flows almost straight to profit. Many businesses set a price once, based on what a competitor charges or what "feels about right", and never revisit it.
Start by knowing your true costs
You can't price for profit if you don't know what something costs you to deliver. That means more than the obvious direct costs — it includes a fair share of your overheads and, crucially, the cost of your time. Count your own hours against each service, and the busiest, "cheapest" service can turn out to be barely profitable.
Understand your margins
Gross margin — what's left after the direct cost of delivering the work — is the number that funds everything else: your overheads, your salary, your growth. A price that looks healthy can hide a thin margin once delivery costs are in. Knowing your margin per product, service or customer type tells you where the real money is made, and where you're busy but not better off.
Price on value as well as cost
Cost sets the lowest price you can charge. What a customer will happily pay depends on the value and outcome you deliver. Businesses that only ever add a markup to cost tend to leave money on the table — especially service businesses, where the value delivered can far exceed the hours spent.
What a 10% discount costs
The figures here are illustrative, but the arithmetic is the point and it holds at any size. A business sells 2,500 units a year at £100. Each one costs £60 to deliver, so the gross margin is £40 a unit, or 40%. That is £250,000 of turnover, £150,000 of direct costs and £100,000 of gross profit. Overheads run at £80,000, which leaves £20,000 of net profit.
Now discount by 10%. The price drops to £90, delivery still costs £60, and the margin falls from £40 to £30 a unit — a quarter of the gross profit on every sale, given away for a tenth off the price. Sell the same 2,500 units and gross profit falls to £75,000, which after £80,000 of overheads is a £5,000 loss. To get back to the same gross profit at the new price you would need to sell 3,334 units, a third more work and delivery cost for the same gross profit.
Run it the other way. Put the price up 10% to £110 and the margin goes from £40 to £50 a unit. At the same volume, gross profit rises to £125,000 and net profit goes from £20,000 to £45,000 — more than doubled, on a change most customers would not query. Better still, you could lose a fifth of your volume, dropping to 2,000 units, and still make the same £100,000 of gross profit with 500 fewer jobs to deliver.
The rule underneath all of that is one line of arithmetic you can do this week. Divide your current gross profit by the margin per unit at the price you are considering, and you have the volume that price needs. Do it before you agree the next discount. The same sum is worth running on your own time as a cost: if you take £75,000 a year out of the business and work 2,300 hours to do it, your hour is worth roughly £33, and any job that absorbs ten unbilled hours of it has £330 of cost in it that never appeared on a quote.
The common mistakes
- Competing on price. Competing on price works only for a business whose costs are lower than its competitors' costs.
- Never increasing prices. Costs rise every year; if your prices don't, your margin erodes.
- Discounting by default. A 10% discount can wipe out a large chunk of profit — often you'd need a big jump in volume just to stand still.
- One price for everyone. Different customers value different things, and tiered or packaged pricing lets each one choose the level they want.
Reviewing and testing prices
Review your prices regularly against your costs and margins, and test a higher price on new customers before rolling it out.
Pricing reviews with Buzz
Our advisory work and business coaching use your actual numbers to find where you're underpriced and model the impact of a price change. If you want to do some of the thinking first, our value gap worksheet works through where profit is leaking, and what a new hire costs covers the cost side of the margin.
