Why a 1% Price Rise Beats 1% More Sales

Ask most owners how they plan to grow and the answer is more: more customers, more orders, more sales. Ask when they last put their prices up and there's usually a pause.

That's the wrong way round. For most SMEs, price is the most powerful profit lever they have, and the one they pull least.

The maths

Take a business with £4m of sales, a 40% gross margin and £1.2m of overheads. Operating profit is £400,000. (This is Brightwater Fabrications, the fictional example from our Levers for Growth guide.)

• Raise prices by 1% and, if customers buy the same amount, every extra pound drops straight to profit. That's £40,000, a 10% rise in operating profit.
• Sell 1% more at the same price and you also have to pay for 1% more materials, labour and delivery. You keep only the 40% margin: £16,000.

Same 1%. Two and a half times the result.

Discounts work the same way, in reverse

A discount comes straight off your margin, so you have to sell a lot more just to stand still. At a 40% gross margin:

• A 2.5% price cut needs 6.7% more volume to make the same gross profit
• A 5% cut needs 14.3% more
• A 10% cut needs 33.3% more

The formula is simple: extra volume needed = price cut ÷ (gross margin − price cut). At 40%, a 5% cut needs 5 ÷ 35 = 14.3% more sales. And that's before the extra work, stock and unpaid invoices that the extra volume brings.

The same maths runs in your favour on a price rise. Put prices up 5% and you could sell 11% less and still make the same gross profit.

Why owners don't do it

In my experience it's rarely the customers who stop a price rise. It's the fear of what customers might say. A few patterns come up again and again:

• Prices haven't moved in two or three years, so any rise now feels like a big one
• The loudest customer sets the price for everyone
• Extras such as rush jobs, small orders and revisions are given away because no one decided to charge for them
• Nobody knows which customers are actually profitable

Five ways to raise prices without losing good customers

1. Review prices at least once a year, and give customers notice. A small, expected rise is easier for everyone than a large one after three years of silence.
2. Price new customers and new work first. They have no old price to compare with.
3. Charge for what you give away: rush jobs, small orders, extra revisions, delivery, out-of-hours support.
4. Offer good, better and best options, so customers choose their own price point rather than haggling over one.
5. Find your least profitable customers by gross margin, then reprice them or part company on good terms.

Do this next

Pull your gross margin by customer for the last 12 months. Look at the bottom ten. If you wouldn't take that work on today at that price, it's time for a conversation.