Pricing is the fastest lever in any business: it changes profit immediately, costs nothing to pull, and requires no new customers. It is also the lever most small businesses leave untouched for years, usually because the founder is comparing their price to a competitor's rather than to the value of the outcome they deliver.
Cost-plus is a floor, not a strategy
Adding a percentage to your cost tells you the lowest price at which you can survive. It cannot tell you what to charge, because it says nothing about the buyer. Two businesses can have identical costs and completely different prices — one sells a commodity, the other sells the version that removes a specific, expensive headache.
Start with cost-plus anyway, because you need the floor before you can reason about anything else. Then get the full cost in, including the parts that people leave out: payment processing, packaging, shipping to the customer, returns and replacements, the time you spend on support, and the cost of the marketing it took to win the sale.
The three prices you need
| Price | What it is | How to set it | What it is used for |
|---|---|---|---|
| Floor | The lowest price that still leaves a contribution to fixed costs | Fully loaded unit cost plus the minimum margin your model needs | Large orders, negotiating, deciding whether to bid at all |
| Target | The price you quote by default | Floor plus a premium reflecting speed, reliability, expertise or outcome | Most quotes, most customers, most of the time |
| Walk-away | The price below which you decline, even if you want the work | Usually your floor, or the point where the working capital required outweighs the profit | Protecting the business from a bad decision made in a good mood |
Write all three down and keep them visible. The value of the walk-away price is not that you will often use it; it is that deciding it in advance stops you negotiating against yourself in a live conversation.
Pricing against the outcome, not the hours
Value-based pricing has a reputation for being abstract. In practice it is one question asked at the right moment: what does this cost the buyer if it does not happen? Answers tend to be concrete — a delayed shipment that misses a retail season, a failed audit, a machine that stays idle for another day, a holiday cancelled.
You can find that number without being pushy. In a sales conversation, ask what happens if the problem stays as it is, and then stay quiet. Most buyers will quantify it themselves. Once you know the cost of the problem, a price that is a fraction of that number stops feeling expensive to justify.
Signal the tier by what changes, not by what is removed
When you offer more than one option, differences should be about outcomes, not about crippling the cheap version. Buyers notice artificial limits and it makes the whole price list feel arbitrary. Three tiers that work in almost any service business:
- Do it yourself. You provide the plan, the templates and the sequence; they execute. Lowest price, clearest scope.
- Do it with you. You provide the plan plus checkpoints and review calls. This is usually the most popular tier because it shares risk.
- Done for you. You deliver the outcome and carry the responsibility. Highest price, and only offered when you genuinely have the capacity.
What a discount really costs you
Discounts feel small because they are expressed as a percentage of price. Expressed as a percentage of profit, they are much larger.
| Your normal margin | You give a 5% discount | You give a 10% discount | You give a 20% discount |
|---|---|---|---|
| 50% | Profit falls 10% | Profit falls 20% | Profit falls 40% |
| 30% | Profit falls 17% | Profit falls 33% | Profit falls 67% |
| 20% | Profit falls 25% | Profit falls 50% | Profit wiped out |
| 10% | Profit falls 50% | Profit wiped out | You are paying to do the work |
The arithmetic is simple: on a 30% margin, a 10% discount takes profit per unit from 30 to 20, because the cost does not move. You then need 50% more units to make the same profit. So when someone asks for a discount, trade it — a longer commitment, a deposit, a case study, a faster payment date, or a reduced scope. A discount given for nothing trains the customer to ask again next time.
Raising prices without drama
- Start with new customers. Change the price on your website and in new quotes today. Nothing needs announcing, and every new sale is at the better number.
- Give existing customers notice. Thirty to sixty days is normal, in writing, with the effective date at the top. Do not bury it at the bottom of an email.
- Honour quoted prices for a stated window. Say the window explicitly — “quotes issued before 15 October are honoured at the old price for 30 days” — and you convert a price rise into a reason to decide.
- Say what the increase covers, in one sentence. Freight costs, supplier prices, an added service, a longer support window. A short reason outperforms a long apology.
- Expect a few departures and prepare for them. Losing the customers who were only ever willing to pay below your floor is not a loss; it is capacity returning to you.
When to revisit your prices
Three triggers should be enough to prompt a review, and you can put them on a calendar rather than relying on instinct:
- Your input costs moved by more than a few percent — freight, materials, labour, platform fees, payment charges.
- You say yes to nearly everything. A high win rate is usually a sign that the price is too low, not that you are excellent.
- Your capacity is full and you are turning work away. The market is telling you the price is below clearing level; raise it until you stop being overwhelmed.
Frequently asked questions
What is a good gross margin for a small business?
It depends entirely on the model. A distributor selling other people's products might run at 15–30%, a service business at 40–60%, and software at 70% or more. The useful test is not the industry average but whether your gross profit per unit covers your share of fixed costs at a realistic volume.
Is markup the same as margin?
No, and confusing them is one of the most expensive small business mistakes. Markup is profit as a percentage of cost; margin is profit as a percentage of the selling price. A product bought for 70 and sold for 100 has a 30% margin and approximately 43% markup.
How do I raise prices without losing customers?
Give notice, make it about dates rather than apology, and keep the value visible. Tell existing customers when new prices take effect, honour anything already quoted for a stated window, and explain in one sentence what the increase covers.
Should I ever sell below cost?
Almost never deliberately, and never without knowing the number. The exceptions worth considering are strategic: winning a reference customer, clearing stock that would otherwise be written off, or buying a position in a market where you have a credible plan to raise prices later. Write down which one applies before you discount.