Pricing Strategies for Profitability: Charge What You're Worth

Most small business owners underprice. They price based on what feels comfortable, what competitors charge, or what they think customers will pay—without understanding their actual costs or the value they deliver.

The result: working hard but not keeping enough money.

Pricing is one of the most powerful levers for profitability. A 10% price increase can translate to a 30-50% profit increase. Yet most businesses focus on cutting costs rather than charging appropriately.

This guide covers pricing strategies that build profitable businesses.

Why Pricing Matters So Much

Consider this example:

Current situation:

• Revenue: $100,000
• Costs: $85,000
• Profit: $15,000 (15% margin)

With 10% price increase (assuming volume stays same):

• Revenue: $110,000
• Costs: $85,000
• Profit: $25,000 (22.7% margin)

That 10% price increase created a 67% profit increase. Nothing else in your business has that kind of leverage.

Common Pricing Mistakes

Underpricing Out of Fear

“If I charge more, they’ll go somewhere else.”

Maybe some will. But others will perceive higher quality. And you’ll need fewer customers to make the same money.

Matching Competitor Prices

“Everyone else charges $X, so I will too.”

You’re not everyone else. Your costs, value, and target market may be different. Copying competitors puts you in a race to the bottom.

Cost-Plus Only

“My costs are $X, so I’ll charge $X plus 20%.”

Cost-plus ensures you don’t lose money, but it ignores value. Customers don’t pay for your costs—they pay for outcomes.

Hourly Pricing for Services

“I charge $75/hour.”

Hourly pricing punishes efficiency. The better you get, the less you earn. And it caps your income at hours available.

Emotional Pricing

“That feels like too much to charge.”

Your comfort has nothing to do with value. Price based on data, not feelings.

Pricing Foundations

Know Your Costs

Before setting prices, understand your costs:

Direct costs: What it costs to deliver this specific product/service Indirect costs: Overhead allocated to this offering Full cost: Total cost to deliver

You must price above full cost or you’re losing money, regardless of what competitors charge.

Know Your Value

What outcome do you create? What problem do you solve?

Example:

• A bookkeeper who saves a business owner 10 hours/month
• At $100/hour opportunity cost, that’s $1,000/month in value
• Charging $400/month is a bargain for the client

Price based on value created, not time spent.

Know Your Market

Understand what customers pay:

• What do competitors charge?
• What do customers expect to pay?
• What’s the range in your market?

You don’t have to match the market, but you should know it.

Pricing Strategies

Cost-Plus Pricing

Method: Calculate costs, add a markup

Formula: Price = Cost × (1 + Markup %)

Example:

• Cost: $50
• Markup: 40%
• Price: $50 × 1.40 = $70

When to use: Products, commodities, low-differentiation services

Pros: Simple, ensures cost coverage Cons: Ignores value, may leave money on table

Value-Based Pricing

Method: Price based on value delivered, not cost incurred

Process:

1. Identify the problem you solve
2. Quantify the value of solving it
3. Price as a fraction of that value

Example:

• Your service helps clients save $20,000/year in tax
• Price: $5,000/year
• Client ROI: 4:1—obvious value

When to use: Services, solutions with measurable outcomes

Pros: Higher prices, aligns with customer value Cons: Requires understanding customer outcomes

Competitive Pricing

Method: Set prices relative to competitors

Options:

• Match: Same price, compete on other factors
• Premium: Higher price, must justify with value
• Discount: Lower price, compete on price (dangerous)

When to use: Commodity markets, established price expectations

Pros: Market-appropriate, easy to implement Cons: Doesn’t differentiate, race to bottom risk

Tiered Pricing

Method: Multiple price points for different service levels

Example:

• Basic: $99/month (core features)
• Professional: $199/month (additional services)
• Premium: $499/month (full service)

When to use: Services with varying scope, software, subscriptions

Pros: Captures different willingness to pay, upsell path Cons: Complexity, feature creep

Package/Bundled Pricing

Method: Combine multiple offerings at a single price

Example: Instead of:

• Bookkeeping: $400/month
• Payroll: $150/month
• Advisory: $200/month

Offer:

• Complete Financial Package: $650/month

When to use: Complementary services, when bundling increases value

Pros: Higher total sale, perceived value Cons: Some customers may want components only

Project-Based Pricing

Method: Fixed price for defined scope

Example: “Website design: $5,000” instead of “$100/hour × unknown hours”

When to use: Services with definable scope, clients who want cost certainty

Pros: Client predictability, rewards efficiency, easier to sell Cons: Scope creep risk, must estimate well

Retainer Pricing

Method: Fixed monthly fee for ongoing availability/service

Example: “$2,000/month for up to 20 hours of support”

When to use: Ongoing relationships, advisory services

Pros: Predictable revenue, client relationship Cons: Scope management required

Implementing Price Increases

When to Raise Prices

• Costs have increased
• You’ve added value or expertise
• Demand exceeds capacity
• You haven’t raised prices in a year+
• Customers aren’t price-sensitive

How to Raise Prices

For new customers: Just start quoting the new price.

For existing customers:

1. Give advance notice (30-90 days)
2. Explain the reason (briefly)
3. Emphasize value delivered
4. Be confident and matter-of-fact

Example communication: “Effective [date], our monthly bookkeeping rate will increase to $X. This reflects our ongoing investments in training and technology to serve you better. We appreciate your business and look forward to continuing to help you succeed.”

Handling Pushback

If customers complain:

• Listen to their concern
• Reiterate value provided
• Stand firm on price (mostly)
• Be willing to lose price-sensitive customers

The customers who stay after a price increase are often your best customers. The ones who leave over 10% were probably marginal anyway.

Pricing for Services

Service pricing deserves special attention because it’s where most underpricing happens.

Moving Beyond Hourly

Problems with hourly:

• Punishes efficiency
• Creates client anxiety about costs
• Caps your income
• Invites micromanagement

Alternatives:

• Project-based fees
• Monthly retainers
• Value-based pricing
• Outcome-based pricing

Pricing High-Value Services

For consulting, professional services, and expertise:

1. Identify the transformation: What does the client get?
2. Quantify the value: What’s it worth in dollars?
3. Price proportionally: 10-30% of value is fair
4. Communicate value: Help clients see the ROI

Example:

• Profit First implementation
• Average client increases profit by $30,000/year
• Your fee: $5,000
• Client ROI: 6:1 in year one, higher ongoing

The Anchor Strategy

When presenting proposals:

1. Start with highest option (anchor)
2. Present middle option (target)
3. Show lower option (contrast)

Customers often choose the middle, and the high option makes the middle seem reasonable.

Pricing for Products

Margin Requirements

Understand your margin needs:

Gross margin = (Price - COGS) / Price

Business Type	Target Gross Margin
E-commerce (drop ship)	15-30%
E-commerce (own inventory)	40-60%
Retail	50%+
Manufacturing	35-50%

Keystone and Beyond

Traditional retail keystone: 100% markup (50% margin)

• Cost: $10 → Price: $20

But you can charge more if:

• You add value (curation, expertise, service)
• You have unique products
• Your customers value convenience

Volume Considerations

High-volume, low-margin vs. low-volume, high-margin:

Approach	Volume	Margin	Revenue	Profit
High volume	1,000	20%	$50,000	$10,000
Low volume	200	60%	$30,000	$18,000

Higher margins often mean higher profit with less work.

Testing Your Prices

A/B Testing

Test different prices with different segments:

• Different landing pages
• Different audiences
• Different time periods

See what converts without sacrificing too much volume.

Gradual Increases

Raise prices incrementally:

• 5-10% at a time
• Monitor customer reaction
• Watch close rates and retention
• Adjust based on feedback

Market Research

Ask customers:

• “What would you expect to pay for this?”
• “At what price would this be too expensive?”
• “At what price would this seem too cheap to trust?”

The answers inform your range.

Signs You’re Underpriced

• High demand with no capacity
• Customers never push back on price
• You’re much cheaper than alternatives
• Profit margins are thin despite busy schedule
• You feel resentful about what you earn

Signs You’re Overpriced

• Very low close rate (under 20%)
• Frequent price objections
• Losing to cheaper competitors consistently
• Lots of nibbles, few buyers

Your Pricing Action Plan

Immediate

1. Calculate your full cost for key offerings
2. Research 3-5 competitor prices
3. Identify the value you create (in dollars if possible)

This Quarter

1. Evaluate current prices against cost, value, and market
2. Identify 1-3 offerings to reprice
3. Communicate changes to existing customers (if applicable)
4. Quote new prices going forward

Ongoing

1. Review prices annually at minimum
2. Track close rates and customer feedback
3. Raise prices when justified
4. Experiment with different pricing models

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Want help understanding your profitability and pricing? At Profit Path Books, we help small business owners understand their numbers and make decisions that improve margins. Book a consultation to discuss your situation.