To price for profit, work out the gross margin your business needs, then set prices from that number and the value your customer receives. Do not set them from cost plus whatever percentage you have always added, or from what competitors charge. Underpricing is rarely a lack of courage alone. More often, nobody has worked out in plain numbers what each pound of price is doing for the business.
Underpricing has a cost you can measure. It shows up as long hours for thin returns, no cash to invest, and an owner too stretched to lead. Here is how I would approach it.
Know the difference between markup and margin
Markup is profit as a percentage of cost. Margin is profit as a percentage of price. If something costs you £60 and you add a 40% markup, you sell it for £84. Your gross margin is not 40%. It is £24 out of £84, about 28.6%.
If your quotes are built on markup while your accounts report margin, you will feel busy and wonder where the money went. Pick margin, use it everywhere, and make sure anyone who quotes prices understands it.
Work out the margin you actually need
Start with next year's overheads. If you are not already paid a proper market salary through the payroll, add the difference, so the figures reflect what it would cost to replace you. Then add the profit before tax you want the business to make, which is what funds investment, reserves and a return for you as the owner. That total is the gross profit the business must earn.
Divide it by your expected sales and you have your target gross margin. If you need £600,000 of gross profit from £1.5 million of sales, you need a 40% gross margin across the business. Now compare that with the margin each product, service and customer actually delivers. You will see which work pays for the business and which is quietly being subsidised.
Know what each customer costs to serve
Two customers can pay the same price and leave you with very different profit. One pays on time and orders in a predictable way. The other wants rush jobs, endless changes and ninety days to pay. Payment terms are part of the price, and so is the time your team spends. Where a customer costs more to serve, either the price should reflect it or the terms should change.
Understand what a discount really costs
Here is a simple illustration, not a real client. At a 40% margin, a £100 sale leaves you £40. Give a 10% discount and you sell for £90, but your costs have not changed, so you keep £30. To earn the same £40 of gross profit you would need to sell a third more.
The arithmetic also works in your favour. At the same margin, a 5% price increase takes gross profit per sale from £40 to £45, so you could sell about 11% fewer units and earn the same. That does not make every price rise safe. It does mean the decision deserves a calculation rather than a gut feeling. And if your sales team is paid on revenue rather than margin, you are rewarding exactly the discounting that hurts you.
Give people a reason to pay more
Pricing power comes from being clearly different. If a customer cannot tell you apart from the next supplier, price is the only thing left to compare. Be specific about the outcome you deliver: the risk you remove, the time you save, the problem that stops landing on their desk. Price somewhere between your cost and that value. Where it fits, offer two or three clearly different options, so customers choose how much they want rather than simply saying yes or no.
The hardest part is in your head
Most owners who undercharge already suspect it. What stops them is the fear that customers will leave, or a quiet belief that they are not the kind of business that charges more. Decide your price before the conversation, not during it. Practise saying it out loud. Say it plainly, explain what the customer gets, and then stop talking. Customers notice when a supplier is unsure of its own price.
Change prices with care
Review prices at least once a year, not only when rising costs force you to. Test new prices with new customers first, and raise prices by product or customer group rather than across the board. Before changing prices for existing business customers, check what your contracts say about price changes and notice periods. Give people fair warning and explain what they get.
Stay on the right side of the rules
If you sell to other businesses, prices are commonly quoted excluding VAT. Make it obvious, for example "£5,000 plus VAT". Remember that not every business customer can reclaim VAT: those that are not VAT registered, and many in sectors such as financial services, healthcare and education, will treat the VAT-inclusive figure as the real price.
If you sell to consumers, the bar is higher. The Competition and Markets Authority's guidance on the Digital Markets, Competition and Consumers Act 2024 says the headline price should normally be the total price, including VAT and any unavoidable fees, and that hiding extra charges until later in the buying process (drip pricing) is unlawful. The CMA can now fine businesses directly. If you sell to both, make sure each audience sees the right price, and take independent legal and tax advice if you are unsure.
One thing to do this week
Before Friday, work out the real gross margin on your five largest customers, after the time and terms they cost you. Then ask yourself one question: if any of them asked to start working with you today, would you accept those terms?
Pricing is one of the few decisions that can change profit without anyone working harder. It is also one of the easiest to put off. Having people around you who will ask the hard questions, and who have faced the same decisions, makes it far easier to act.
If you would like to think this through with other established owners, a Growth Board is one place to do it, or we can talk about one-to-one support.
Sources: Competition and Markets Authority, Providing clear and accurate information about prices: summary (CMA209), GOV.UK, which summarises the CMA's guidance on the price transparency rules in the Digital Markets, Competition and Consumers Act 2024. Pricing examples in this article are illustrative only.