One of the most common issues we see when working with small business owners is not a lack of sales, but a lack of profit.
Many businesses are busy. Some are growing rapidly. Yet the owner is still struggling with cash flow because their pricing hasn’t kept pace with costs, inflation, or the value they provide.
The truth is simple: if your pricing is wrong, working harder won’t fix the problem.
How Should You Price Your Product or Service?
Most business owners use one of three pricing methods:
1. Cost-Based Pricing
This is the simplest approach.
Calculate what it costs to deliver your product or service and add a profit margin.
Example
- Materials: $200
- Labour: $300
- Overheads: $100
Total cost = $600
Add a 30% profit margin and your selling price becomes $857. ($600/70%)
While this provides a useful starting point, it doesn’t consider what customers are willing to pay.
2. Competitor-Based Pricing
Many businesses simply look at competitors and match their prices.
This can be dangerous.
Your competitor may have lower costs, better systems, or they may not even be making money themselves.
Matching their prices does not guarantee you’ll be profitable.
3. Value-Based Pricing
This focuses on the value of the outcome delivered to the customer.
Example
If a consultant helps a business save $50,000 per year, a $5,000 fee may represent excellent value regardless of the consultant’s internal costs.
The question becomes:
“What is this worth to the customer?”
rather than
“How many hours did this take?”
The Biggest Pricing Mistakes Small Business Owners Make
Mistake #1: Competing on Price
Many business owners believe lower prices will win more customers.
Sometimes they do.
But they often attract the wrong customers.
Price-sensitive customers are usually the first to leave when another provider offers a lower price.
Competing on value creates far more sustainable businesses than competing on price.
Mistake #2: Forgetting to Include Your Own Time
This happens regularly.
A tradesperson charges $2,500 for a job and thinks they’ve made a good profit.
But they forget to include:
- Time quoting
- Travel time
- Supplier coordination
- Administration
- Client communication
After factoring everything in, the profit is often much lower than expected.
Mistake #3: Never Increasing Prices
A business that charged $1,000 for a service in 2021 may still be charging $1,000 today.
Unfortunately:
- Staff costs have increased
- Rent has increased
- Insurance has increased
- Technology costs have increased
If prices stay the same while expenses rise, profits shrink.
A small annual increase is usually easier for clients to accept than a large increase after several years.
Mistake #4: Discounting Too Quickly
A client asks for a proposal.
Before the client even responds, the business owner offers:
- A discount
- Free extras
- Additional support
Instead of reducing price, focus on explaining value.
Good clients are often willing to pay more when they understand the benefits.
Mistake #5: Winning Every Quote
This may sound strange, but winning every quote is often a warning sign.
If every potential customer says yes immediately, your prices may be too low.
Businesses should expect some prospects to decide they are too expensive.
That’s often a sign your pricing is closer to where it should be.
When Should You Review Your Pricing?
At least once per year.
Ask yourself:
- Have my costs increased?
- Has my experience increased?
- Are we delivering more value than we were before?
- Are we generating the profit we need?
If the answer to any of these questions is yes, it may be time to review your pricing.
A Simple Pricing Test
Before setting prices, ask yourself:
- Do I know my true cost of delivery?
- Am I making the profit I need?
- Have I reviewed pricing in the last 12 months?
- Can I clearly explain the value I provide?
If the answer is “no” to any of these questions, there is a good chance your pricing needs attention.
Final Thoughts
The businesses that achieve long-term success are rarely the cheapest.
They understand their costs, know the value they create, and have the confidence to charge appropriately.
As accountants, we often see business owners focus on increasing sales when the real opportunity is improving profits.
In many cases, a small increase in prices can have a bigger impact on profit than months of chasing additional revenue.