Your Prices Are Probably Too Low. Here's How to Check.

Underpricing is more damaging than most founders realise, because the maths compounds. A 10% price increase on a £300,000 revenue business is £30,000 of additional gross income — almost entirely profit, assuming your variable costs don't change. You'd have to find 10 new clients worth £3,000 each to achieve the same result through volume.

The question isn't whether you can raise prices. It's whether you know what your current prices are actually doing to your margins.

Start With Gross Margin

Gross margin = (Revenue − Cost of Sales) ÷ Revenue × 100

Cost of sales means the direct costs of delivering your product or service: materials, direct labour, subcontractors, production costs. Not overheads.

Rough benchmarks by sector (UK SME averages):

If you're below the floor for your sector, you're either underpricing, over-spending on delivery costs, or both. These are different problems with different solutions.

The Contribution Per Hour Trap

Many service businesses price on day rates or project fees without calculating their effective hourly contribution — what actually lands after direct costs and time.

Example: a small agency charges £12,000 for a website project. The project takes 120 hours of billable staff time, with a direct cost (including NI, holiday accrual, software) of £55/hour = £6,600. Gross contribution: £5,400. Effective contribution per hour: £45.

Now the business has £5,400 to cover its £18,000/month overhead. If the business takes on four similar projects per month, it generates £21,600 gross contribution — barely covering costs and leaving almost nothing for profit.

Running this calculation per service line or client type often reveals that two or three jobs or clients are subsidising the rest. That's useful to know.

Three Signs Your Prices Are Too Low

You're busy but not profitable. Revenue is growing, margins aren't. You're buying yourself a job rather than building a business.

Clients never push back on price. This sounds great. It isn't. It means you're probably not at the ceiling of what the market will pay. Some pushback is healthy — it means you're testing the boundary.

You're discounting to close deals. If you're regularly coming off list price to win work, your list price has no integrity. Either the list price is wrong, or your sales process isn't justifying the value.

Raising Prices Without Losing Everyone

The fear is that a price increase costs more in lost clients than it gains. The maths rarely supports this fear.

If you raise prices by 15% and lose 10% of clients, your revenue goes up. Here's why:

Current: 100 clients × £1,000 = £100,000
After: 90 clients × £1,150 = £103,500

You also have more capacity to serve remaining clients better, or to acquire new ones at the higher rate. And you've shed the clients most likely to be high-maintenance and low-margin.

The practical approach: don't change prices for existing clients immediately. Raise rates for all new business first. Then, when renewing or reviewing existing clients, apply an increase with reasonable notice (3 months is standard in B2B). Most clients who intend to stay, stay.

One Number to Review Quarterly

Net margin = Net profit ÷ Revenue × 100

UK SME median net margin sits around 5–8%. If you're below that, something in the cost or pricing structure needs attention. If you're above 15–20%, you're either in a high-value niche or you have room to invest more aggressively in growth before it disappears.

Knowing this number — and tracking its direction — is the minimum a founder should be doing. Most don't look until the accountant produces the year-end accounts, by which point the year is over.