Pricing decisions are stronger when they are based on current costs and the margin the business actually needs. For owner-managed businesses and limited companies, deciding whether prices need to change can reveal that a busy service, product or customer group is contributing less profit than expected even when turnover looks healthy.
Use current cost and margin information when reviewing prices. Historical prices can become unprofitable gradually as wages, suppliers and overheads move.
Build the real cost base
Include direct labour, materials, subcontract costs, payment fees, delivery costs and the overheads that each sale must help recover. Separate direct costs from overheads so you can see both the contribution from the work and the amount it needs to contribute towards running the wider business.
Watch for a margin signal
A useful warning sign is the same sales volume is producing less gross profit or operating profit than earlier periods. Do not wait for the year-end accounts if current bookkeeping or management reports already show that the margin is moving in the wrong direction.
Review the commercial options
A price increase is not the only response. The business may be able to change purchasing, reduce rework, alter minimum charges, change payment terms or stop low-return work. Compare the effect of each option rather than assuming every customer should receive the same change.
Implement and measure the change
When a decision is made, model the effect of different price changes and review the first full period after implementation. Review the next period to see whether margin improved and whether the change affected sales volume or customer behaviour in an unexpected way.
What to do next
- Use current cost information
- Separate direct costs and overheads
- Measure margin by useful category
- Consider operational changes as well as price
- Review results after changes are introduced
Trade accountancy resources related to this topic
This topic is also relevant to the following specialist trade accountancy resources where the same accounting issue commonly arises.
Frequently asked questions
Is turnover enough to judge pricing?
No. A high-turnover activity can still produce a weak return if direct costs, labour or overhead recovery are too high.
How often should prices be reviewed?
There is no single timetable, but a review is sensible when significant costs change or management information shows sustained margin pressure.
Should every customer receive the same increase?
Not necessarily. The commercial decision depends on the service, contract, customer relationship, costs and the reason the existing margin is weak.
Turn the figures into a clearer accounting process
DD Accounting can help with management accounts, bookkeeping, financial forecasting and wider accountancy support.
This article provides general information only and does not replace advice based on your individual circumstances. Tax rules and reporting requirements can change.
