How Can a Small Business Improve Its Pricing and Profitability?

The direct answer is simple: know the true cost of delivering your service, set prices that reflect both cost and value, and review the numbers regularly.

Many small businesses are busy but not sufficiently profitable. A plumber may complete plenty of jobs but lose money through unpaid travel time, return visits or underpriced materials. An accountant may have a full client list but spend far more time on certain accounts than the original fee allows for. An estate agent may win instructions through low fees but struggle to cover the cost of marketing and administration.

Pricing is not just about charging more. It is about understanding what each service costs, what it is worth to the customer and whether it contributes properly to the business.

This article is part of the Business Unboxed weekly business-growth course. If you have not already done so, it also helps to start with a clear growth plan for your business, because pricing decisions are easier when they support a wider plan. The aim is to help you leave this week with a pricing review you can put into practice immediately.

What is the difference between revenue, profit and cash collected?

Before reviewing your prices, make sure you are using the right financial terms.

Revenue

Revenue is the total amount you invoice or charge customers for your services during a period.

For example, if an electrician completes 20 jobs at an average of £250, their revenue is £5,000 before considering costs, VAT or unpaid invoices.

Revenue tells you the size of your sales activity. It does not tell you whether you are making money.

Gross profit

Gross profit is what remains after deducting the direct costs of delivering a job or service.

> Gross profit = Revenue – Direct costs

Direct costs might include:

• Materials and parts

• Labour spent delivering the job

• Subcontractors

• Job-specific travel

• Payment processing fees

• Specialist software or equipment used for one project

For a solicitor, direct costs could include external legal research, a barrister’s fee or time spent by a fee earner directly on a client matter. For an accountant, direct labour may include the team member’s time spent preparing accounts or completing a tax return.

Net profit

Net profit is what remains after deducting overheads from gross profit.

> Net profit = Gross profit – Overheads

Overheads are the costs of running the business that are not linked to just one job. They could include:

• Premises and utilities

• Insurance

• Salaries and employer costs

• Phones and software

• Advertising and marketing

• Accountancy fees

• Vehicle finance

• General administration

Net profit is closer to the real performance of the business, although the exact figure and treatment of costs will depend on how your accounts are prepared.

Cash collected

Cash collected is the money that has actually reached your business bank account.

This is different from revenue. You may invoice £10,000 in a month but collect only £6,000 if customers have payment terms or overdue invoices.

A business can be profitable on paper but still experience cash-flow pressure. That is why you should monitor both profit and cash collected.

For general background on pricing approaches, Xero UK explains that understanding your direct costs helps you set a sensible pricing floor and then choose an approach such as cost-plus, market-based or bundled pricing in a way that still protects margin. If you want a broader planning check, the Federation of Small Businesses has practical guidance on calculating your break-even point so you can see the level of sales needed to cover costs before profit begins. If you sell to consumers, GOV.UK guidance on price transparency also makes clear that prices should be presented clearly and accurately, with unavoidable or mandatory charges included in the total price where relevant.

How do you calculate the true cost of delivering a job?

The first step is to stop looking only at the obvious costs.

A plumber might think a boiler repair costs £80 because the replacement part costs £80. But the true cost may also include:

• 90 minutes of labour

• Time spent travelling

• Fuel and vehicle costs

• Time spent ordering the part

• Insurance and equipment

• A possible return visit

• Office time spent raising the invoice

Similarly, a lawyer may quote for a piece of work based on the expected legal task but fail to allow for client calls, emails, file management and revisions.

Use this basic calculation for each core service:

> True service cost = Direct labour + Materials or job costs + Travel or delivery costs + Share of overhead

To calculate labour cost, use the actual employment cost rather than simply the employee’s hourly wage. Include employer National Insurance, pension contributions, holiday pay and other employment costs where relevant.

Then consider how many hours are genuinely available for billable work. A business owner may work 40 hours per week, but not all 40 hours can be charged to customers. Time is also needed for sales, administration, planning, training and management.

Which of your services may be underpriced?

A service is potentially underpriced when it produces little profit after all costs and time are included.

Look for warning signs such as:

• You regularly work beyond the time included in the quote

• Customers often request “small extras” that are not charged for

• The service creates many phone calls or revisions

• You need to return to complete or correct work

• Your busiest services generate the least profit

• You feel resentful or rushed when delivering a particular service

• Prices have not changed despite rising costs

• You win almost every quote but have limited capacity

Do not assume that your most popular service is your most profitable service. A high-volume service can consume time and resources while a less frequent service may produce a better return.

Review at least five recent jobs or clients. Compare what you expected to charge with what actually happened.

For each one, record:

This is job costing in its simplest form: connecting the price received to the resources used.

How should a small business set or review its prices?

There are three useful reference points.

1. Your cost floor

Your cost floor is the minimum price needed to cover the cost of delivering the service and contribute towards overhead and profit.

Cost-plus pricing can help establish this floor:

> Price = Cost ÷ (1 – Target gross margin)

If a service costs £300 to deliver and your target gross margin is 40%:

> £300 ÷ 0.60 = £500

The £500 price produces a £200 gross profit, which is 40% of the selling price.

Be careful not to confuse margin with mark-up. A 40% mark-up on £300 produces a price of £420, but the margin is only 28.6%. If you are unsure, ask your accountant to check the calculation.

2. The market

Competitor prices can provide useful context, but they should not be the only basis for your pricing. Competitors may have different overheads, experience, service levels, capacity and business models.

The cheapest provider is not automatically the best option for a customer, and competing only on price can make growth difficult.

3. The value to the customer

Value-based pricing considers the benefit your service creates, rather than only the hours involved.

An emergency electrician may create significant value by restoring power quickly to a business. An accountant may save a client substantial time and reduce the risk of missed deadlines. An estate agent may justify a higher fee through stronger marketing, better communication and a more effective sales process.

You should not promise financial outcomes you cannot guarantee. However, you can explain clearly what is included, what problem you solve and how your service differs from cheaper alternatives.

Could packages make your pricing easier to understand?

Packages can help customers compare options without forcing you to negotiate every quote from scratch.

For example, an accountant might offer:

• Essential: Annual accounts and standard filing

• Complete: Accounts, tax return and quarterly review

• Partner: Ongoing advice, forecasting and priority support

An estate agent might offer different marketing, communication and viewing packages. An electrician might provide standard, priority and maintenance options where the scope and response times are clearly defined.

The important point is that each package must be profitable to deliver. A “premium” package should not simply include unlimited access or unlimited revisions without boundaries.

Set out:

• What is included

• What is not included

• Expected timescales

• Number of visits, calls or revisions

• Payment terms

• Charges for additional work

Where you present package prices to customers, keep the wording clear and make sure any unavoidable or mandatory charges are shown properly rather than added later. That supports customer trust and is consistent with GOV.UK guidance on clear and accurate price information.

What is the 90-minute pricing review exercise?

Set aside 90 minutes this week and complete the following exercise. If you want a wider structure for the session, you can pair this with a clear growth plan for your business so your pricing review feeds into your broader goals.

First 20 minutes: list your main services

Write down your five most common services, job types or client packages.

Next 25 minutes: calculate the true cost

For each service, estimate:

• Direct labour hours

• Labour cost

• Materials or subcontractor costs

• Travel and other job-specific costs

• A fair share of overhead

Do not aim for perfect accounting precision. Aim for a more realistic picture than you had before.

Next 20 minutes: compare price with profit

Record your current price and calculate the approximate gross profit and gross margin.

Highlight any service where:

• The margin is very low

• The actual time is regularly higher than expected

• The price no longer covers current costs

• The service is difficult to deliver consistently

Next 15 minutes: choose one pricing action

Choose one action to implement, such as:

• Increase the price of one underpriced service

• Remove an unprofitable service

• Add a charge for extra visits or revisions

• Introduce a deposit

• Create three clearer service packages

• Review payment terms

• Quote separately for additional work

Final 10 minutes: decide what you will monitor

For the next four weeks, record:

• Quotes issued

• Quotes won

• Average price

• Hours used

• Direct costs

• Gross profit

• Cash collected

• Overdue invoices

Do not change everything at once. Start with one service or one customer segment, review the results and then refine your approach. This is also where scaling without losing control matters: profitable growth is easier when pricing, delivery and admin are supported by repeatable systems. If you want a simpler scorecard for the next four weeks, see [the most important numbers to know and monitor in your business](INTERNAL LINK PLACEHOLDER: blog post ID c08ea50d-d78a-45da-914f-5276f958c2f4), especially for tracking margins, cash collected and overdue invoices.

Frequently asked questions

Should I charge by the hour or by the job?

Hourly pricing can be useful when the scope is uncertain or likely to change. Fixed pricing can give customers greater certainty and reward you for being efficient. Either approach can work if the price covers your true costs and profit requirements.

How often should I review my prices?

Review prices at least quarterly, and sooner when material costs, wages, fuel, software or supplier prices change. A formal review does not always mean an immediate price increase; it means checking that your pricing still makes sense.

What if customers object to a price increase?

Explain what is changing and what the customer receives. You can also offer different service levels rather than discounting the same service. Some customers may not be the right fit at the new price, but frequent objections can also indicate that your value or scope needs to be communicated more clearly.

Should I include VAT in my prices?

Make it clear whether prices are VAT-inclusive or VAT-exclusive, particularly when selling to consumers or quoting in writing. VAT, tax treatment and regulated pricing matters can depend on your circumstances, so seek advice from your accountant or another appropriately qualified professional.

What should you do next?

Profitability improves when pricing becomes a regular business process rather than a decision made under pressure.

Complete the 90-minute review, identify one underpriced service and take one practical action this week. Then monitor what happens to margins, customer response and cash collection.

Business Unboxed helps SME owners build these habits through a practical weekly 90-minute business-growth course. If you run a trade or professional service business and want support turning the numbers into an action plan, you can also speak to Business Unboxed about consulting or advisory support. The aim is straightforward: clearer decisions, better control and sustainable growth without unnecessary hype.