Pricing & margins

Margin and mark-up are not the same

Pricing at “cost plus 25%” gives a 20% margin, not 25%. Confusing the two is one of the most common reasons businesses are busier than they are profitable.

The power of price

Take a business with sales of £1m, direct costs of £600,000 (a 40% gross margin) and overheads of £300,000, making a profit of £100,000.

A 5% price rise with no loss of sales adds £50,000 to gross profit, and increases the bottom line by 50%, to £150,000.

Discounts cost more than you think

The reverse also holds. After a 10% price rise, you could lose 20% of your volume and still make the same gross profit.

Know your true costs

• Direct costs: materials, subcontractors and the labour used on each job or product.
• Labour at its full cost: employer National Insurance, pension contributions, holiday and non-chargeable time, not just the hourly wage.
• Overheads: rent, systems, insurance and management time, recovered through a realistic hourly rate or margin.
• Contribution: what each product, job or customer leaves after its direct costs to pay for overheads and profit.

Break-even

In the example, £300,000 ÷ 40% = £750,000 of sales before the business makes a penny of profit.

How we help

1. Profitability analysis by product, service, job and customer, from your own records.
2. True cost rates for labour and overheads, so every quote covers its costs.
3. Price change modelling showing the effect on profit and the volume you could afford to lose.
4. Monthly margin tracking in your management accounts, so problems show up early.

Before you raise prices

• Know your margin by product or service, so rises go where they are needed most
• Give customers notice, and explain what is changing and why