How to Review Your Prices

A busy calendar or strong sales total does not show which work contributes enough to cover the rest of the business. Prices deserve a review when materials rise, jobs take longer than quoted, demand changes or a popular offer leaves little money after its direct costs. The review should compare actual price, direct cost, time and what customers value. It does not begin with a universal instruction to raise every price by the same percentage.

Choose a specific offer

Start with one repeatable service or product and the last ten comparable sales. Note the actual amount charged after discounts, refunds and fees, excluding tax amounts you collect for a tax authority where relevant. Record costs directly caused by each sale: materials, purchased components, packaging, transaction fees and any separately paid delivery or subcontracted work. For a service, include the time used and the cost of the people delivering it. Keep a consistent definition of direct cost so comparisons mean something. Fixed overhead such as rent also needs covering across the business, but do not arbitrarily add all of it to one job and mistake that number for a precise cost.

Calculate contribution per job: price received minus direct costs. Then compare the time or capacity each job consumes. A 70-unit contribution on a one-hour appointment is different from a 70-unit contribution on a four-hour job that prevents other work. Write down what customers value: speed, reliability, specialist skill, convenience, assurance or a tailored result. Competitor prices can provide context, but a lower competitor price may buy a different service. Government guidance on pricing recommends considering customer value, market context and all relevant costs together.

A worked example

Assume a small repair business charges 150 currency units for a standard callout. Materials and payment fees total 30, and paid delivery time costs 60, leaving 60 contribution before overhead and owner return. The owner discovers that half of the jobs require an extra visit that adds 25 in direct labour and travel. The average contribution for those jobs is only 35. These are illustrative figures and assume the business can measure time and direct costs accurately. The immediate question is whether the quote, the first-visit process or the customer's expectations cause the second visit.

Suppose the owner tests a clearer scope and a 165 price for one clearly defined type of new job. If materials and labour remain 90, contribution becomes 75 per completed job, an increase of 15. Yet if fewer customers accept, the total contribution can fall. At 20 old-price jobs, contribution was 20 × 60 = 1,200. At 15 new-price jobs, it is 15 × 75 = 1,125. At 18 jobs, it becomes 1,350. This simple illustration deliberately ignores capacity changes, overhead, refunds and customer mix; those still matter. Never infer from it that 165 is the right market price.

Run a controlled review

Before changing a price, set a goal: covering a measured cost increase, improving contribution per hour, reducing losses on complex jobs, or making a valuable service easier to understand. Check whether contracts, posted prices or notice requirements limit changes. Decide whether to test a new quote for future customers, a clearer package with the same price, or a time-based charge for work that varies widely. Communicate what is included so customers can compare fairly. Do not hide a change in a confusing fee.

For a small test, choose one offer and a fixed review period. Record the number of qualified enquiries, quotes, acceptances, completed jobs, actual price, direct costs, time and any complaints. Compare with a similar recent period and note marketing, seasonality and staffing differences. A lower conversion rate can be acceptable if contribution and customer fit improve, but a short period may be noisy. If the offer is rarely sold, wait for enough observations before drawing a strong conclusion. A customer who declines can explain whether the problem was price, timing or unclear value; do not assume every lost quote proves the price is wrong.

Distinguish markup, margin and contribution

Markup is an amount added to a cost; margin is usually the share of the selling price left after a defined set of costs. Contribution is the amount available after variable or direct costs to help cover fixed costs and profit. These terms are easy to mix up. If a product costs 80 and sells for 100, the 20 difference is a 25% markup on cost but a 20% gross margin on price, using those definitions. State which costs are included. The U.S. Small Business Administration's break-even guidance uses selling price minus variable cost per unit when examining contribution toward fixed costs. That is a useful calculation, but it does not by itself measure customers' willingness to pay.

A low contribution may be acceptable for a deliberate reason, such as an entry product that reliably leads to profitable repeat work, but confirm that relationship with records. A high price may still be too low if the job consumes scarce specialist time or carries unusual rework risk. Review customer value without claiming that every benefit can be translated into a precise number. For a small retailer, compare sell-through, stock holding and returns along with the gross margin. For a service, watch the time actually taken, not just the time scheduled.

Watch for misleading signals

One large customer may receive a negotiated rate that is not representative of ordinary work. A temporary discount can produce a burst of sales while training customers to wait. Changes to service scope can make a before-and-after price comparison meaningless. Inflation in a supplier's list price does not automatically justify the same percentage change on your whole offer; first calculate the actual effect on your cost per job. Likewise a competitor's headline price may omit work that yours includes.

If a price cannot cover direct costs over time, investigate promptly. If a price change could affect long-term contracts, regulated services, tax presentation or consumer disclosures, check local rules and obtain appropriate advice. An accountant can help distinguish variable costs, fixed overhead and cash timing when your data is incomplete. Treat one small test as evidence about that offer in that period, not as a rule for every customer.

Next step: pick one offer and calculate its actual price, direct cost, contribution and time for ten recent sales. Write down one explanation for low contribution, then test one clearly communicated change and compare contribution per job with customer response.

Sources

• business.gov.au: Choose a pricing strategy. Guidance on cost, customer value and pricing approaches.
• U.S. Small Business Administration: Break-even point. Formula connecting unit price, variable cost and fixed costs.