Why a small price increase usually beats cutting costs
A small price increase usually adds more profit than cutting costs because almost all of the extra revenue flows straight to profit, while cost cuts are limited and can affect service quality. Review prices by working out profit per hour for each service, then adjust the services clients value most.
When profit is tight, most owners look at costs first. Costs matter, but in a service business there's often more opportunity in pricing. Many businesses haven't reviewed their prices in years, even though their experience, demand and costs have all changed.
Why pricing has such a big effect
If you raise a price and keep most of your clients, nearly all of the extra revenue is profit, because your costs to deliver the work barely change. Cost cutting, on the other hand, can only go so far and sometimes reduces the quality clients are paying for.
How to review your pricing
- List every service you offer.
- Estimate the hours each one really takes, including admin and follow-up.
- Work out profit per hour for each service.
- Identify the bottom two services and decide whether to reprice, repackage or stop offering them.
- Look at the services clients value most and test a modest increase on new clients first.
Communicating a price change
- Give existing clients reasonable notice.
- Explain what has improved or what's included, without over-justifying.
- Apply new pricing to new clients first if you're unsure.
- Package related services so clients see the full value.
If nobody ever pushes back on price, it's often a sign you're undercharging.
Don't ignore costs completely
Once pricing is right, review your three largest costs once a year. Software subscriptions are a common place to find savings, as many businesses pay for tools they no longer use.
Common questions
How often should a small business review its prices?
At least once a year, and whenever costs, demand or the scope of your service change significantly.
Will I lose clients if I raise my prices?
You may lose a few price-sensitive clients, but a modest increase on well-valued services usually increases total profit.
Want help applying this to your business?
Book a free 30-minute strategy call, or request a fixed-fee quote for a specific project.
This article is general business information only and doesn't take your circumstances into account. It isn't financial, credit, tax or legal advice.