- The number that matters is contribution: your price minus the cost of delivering one more unit.
- Margin and markup are different. A £60 cost sold at £100 is a 40% margin but a 67% markup, and confusing them causes systematic underpricing.
- A 10% discount on a 40% margin costs you a quarter of your contribution. You need to sell a third more just to stand still.
- Raising prices 10% usually beats winning 10% more customers, because the increase goes straight to the bottom line.
The single most expensive mistake in here is confusing margin with markup. It costs people thousands a year, quietly, and it takes about ninety seconds to fix.
Pricing is the fastest lever in any small business. A 10% price rise usually adds more profit than 10% more customers, because it costs nothing to deliver and it lands entirely on the bottom line. Yet most owners set prices once, by looking at a competitor or guessing, and then leave them alone for years.
This guide covers the arithmetic you need to know your floor, the psychology of what sits above it, and the mechanics of changing prices without losing the customers you have. The pricing and break-even calculator will run any of it on your own figures.
Start with contribution, not profit
Split your costs into two piles. Variable costs change with each sale: materials, delivery, payment processing, subcontractors, the hours of anyone paid per job. Fixed costs do not: rent, salaries, software, insurance, your own time if you draw a regular amount.
Contribution is what one sale gives you after the variable costs of making that sale:
Every pound of contribution goes towards your fixed costs. Once those are covered, every further pound of contribution is profit. That is the whole model.
Break-even follows directly. If your fixed costs are £4,000 a month and each sale contributes £40, you need 100 sales a month before you make anything.
This is why contribution matters more than the headline price. Two businesses charging the same price can have completely different break-even points, and a price rise moves break-even far more than it moves revenue.
Margin and markup are not the same thing
This single confusion causes more underpricing than any other mistake, because the two look similar and produce different numbers.
- Margin is profit as a percentage of the selling price.
- Markup is profit as a percentage of the cost.
An item costing £60 and selling at £100 carries a 40% margin and a 67% markup. Same money, two different percentages.
The damage happens when someone wants a 40% margin and adds 40% to their cost. That gives £84, which is a margin of only 29%. To get a 40% margin you divide the cost by 0.6, not multiply by 1.4.
| Cost | Target margin | Right price (cost ÷ (1 − margin)) | Wrong price (cost × (1 + margin)) | Margin you actually get |
|---|---|---|---|---|
| £60 | 30% | £85.71 | £78.00 | 23.1% |
| £60 | 40% | £100.00 | £84.00 | 28.6% |
| £60 | 50% | £120.00 | £90.00 | 33.3% |
| £60 | 60% | £150.00 | £96.00 | 37.5% |
The error grows as the target margin rises. At a 60% target, the wrong method leaves you nearly £54 short on every single sale.
What a discount really costs
Discounts feel small because we compare them to the price. They should be compared to the contribution, because that is where they come from.
Move the sliders below. The discount comes entirely out of your margin, and the extra volume needed to stand still rises much faster than most people expect.
A 10% discount on a product with a 40% margin costs a quarter of your contribution. You need to sell a third more units to make the same money. If your margin is thinner, the effect is brutal: at a 20% margin, a 10% discount halves your contribution and you need to double your sales.
It only works if the lower price genuinely brings in enough additional customers, and if you have the capacity to serve them. If you are discounting to win work you would probably have won anyway, you are simply giving money away.
Everything above the floor is a judgement call
Cost-plus pricing tells you the price below which volume actively harms you. It says nothing about what customers will pay, which is usually a lot more.
What customers will pay depends on two things: the alternatives available to them, and the size of the problem you solve. A plumber fixing a leak at 11pm is not priced the same as one fitting a radiator next month, and the cost of doing the work barely differs.
What it is: add a target margin to what delivery costs you.
Good for: products with clear unit costs, and for establishing the floor below which you should never go.
The risk: it ignores the customer entirely. If your costs happen to be low, you will underprice something valuable. If your costs are high because you are inefficient, you will price yourself out.
What it is: price relative to what comparable providers charge.
Good for: crowded markets where customers can easily compare, and as a sanity check on any other method.
The risk: you inherit someone else's mistakes, and you compete on the one dimension where the biggest player always wins. It also assumes your competitors know what they are doing, which is often generous.
What it is: price against what the outcome is worth to the customer.
Good for: anything where the result is measurable, urgent or expensive to get wrong. Most professional services sit here.
The risk: it needs you to understand the customer's situation well enough to describe the value credibly. Done badly it sounds like a justification for a high number.
In practice you want all three. Cost-plus sets the floor, market tells you roughly where you sit, and value decides what you actually charge.
How to raise prices without losing customers
Most owners overestimate how many customers they will lose. Run the arithmetic first: at a 40% margin, a 10% price rise means you could lose about a fifth of your customers and still make the same profit, while doing considerably less work.
A price rise that sticks
0 of 7They are usually the ones who take the most time, query every invoice and refer nobody. Losing a few of them while the rest stay is not a bad outcome. It is often the point.
Five pricing mistakes worth avoiding
- Pricing from your own wallet. What feels expensive to you is not related to what the work is worth to a customer with a different problem and a different budget.
- Forgetting unbillable time. If you charge by the day, quotes, admin and travel all come out of the same week. See the day rate calculator for what that does to an hourly figure.
- One price for very different jobs. Urgency, risk and scope vary enormously. A single rate means you lose money on the hard jobs and overcharge for the easy ones.
- Competing on price against someone bigger. They have better buying power and can outlast you. Compete on responsiveness, specialism or service instead.
- Never reviewing. Costs rise every year. A price held for three years is a price cut in real terms, taken quietly and without anyone deciding to take it.