More sales don't necessarily mean more money. If your pricing is wrong, you can work harder, grow faster and still make less profit.

There is a number many business owners love seeing:

Turnover.

£100,000.

£500,000.

£1 million.

It feels good.

And revenue growth is important.

But here's the uncomfortable truth:

Turnover is vanity. Profit is sanity. Cash is reality.

You can double your sales and still have a worse business.

How?

Because if your prices are too low, your margins are too thin, your costs are rising or you're spending too much to acquire each customer, additional sales can actually create additional pressure.

This is why pricing should never be based simply on:

"What are competitors charging?"

or:

"What do customers seem willing to pay?"

Your pricing needs to work for your business.

Revenue isn't profit

Let's start with a simple example.

Business A:

£500,000 revenue

£400,000 costs

£100,000 profit

Business B:

£700,000 revenue

£620,000 costs

£80,000 profit

Which business would you rather own?

Business B has:

£200,000 more turnover

but:

£20,000 less profit.

The headline sales number makes Business B look bigger.

The profit number tells you which business is financially stronger.

This is why turnover alone is a poor measure of business success.

Your price needs to do more than cover your costs

At the most basic level, your price needs to cover:

Direct costs + overheads + profit

But there is another important consideration:

capacity.

If you have limited capacity, every sale uses some of it.

Imagine you're a consultant who can realistically deliver:

100 billable hours per month.

You charge:

£50 per hour.

Maximum monthly revenue:

£5,000

Now imagine you increase your rate to:

£75 per hour.

The same 100 hours generate:

£7,500

You haven't worked any additional hours.

You've simply improved the economics of your capacity.

That's why pricing is one of the most powerful profit levers available to many SMEs.

Start with your costs

Before deciding whether your price is profitable, understand what it actually costs to deliver your product or service.

Some costs are obvious.

Others aren't.

Direct costs

These might include:

  • materials

  • stock

  • subcontractors

  • delivery

  • payment processing

  • direct labour

  • packaging

Indirect costs

These might include:

  • rent

  • software

  • insurance

  • accounting

  • marketing

  • administration

  • utilities

  • management

  • professional fees

The key is understanding how much of your revenue needs to contribute towards those costs.

Gross margin matters

One of the most useful pricing metrics is gross margin.

The calculation is:

Gross Profit ÷ Revenue × 100

For example:

Selling price:

£100

Direct cost:

£60

Gross profit:

£40

Gross margin:

40%

Now imagine you discount the product to £80.

Your direct cost remains £60.

Gross profit:

£20

Gross margin:

25%

You reduced the price by 20%.

But your gross profit per sale fell by 50%.

That's a huge difference.

The danger of discounting

Discounting can feel harmless.

A customer says:

"Can you do it for £90?"

You think:

"It's only £10 off."

But the impact on your margin could be much larger.

Imagine:

Price: £100

Direct cost: £60

Gross profit: £40

You discount by 10%.

New price:

£90

Gross profit:

£30

You've reduced your gross profit by:

25%

To recover the lost £10 of gross profit, you'd need to sell more units.

This is why discounts should be viewed through the lens of profit, not just revenue.

How much extra do you need to sell after a discount?

Let's take a simple example.

Your normal price:

£100

Direct cost:

£60

Gross profit:

£40

You offer a 10% discount.

New price:

£90

Gross profit:

£30

To generate the same £4,000 gross profit:

At £100 price:

100 sales × £40 = £4,000

At £90 price:

134 sales × £30 = £4,020

You need roughly 34% more sales to generate approximately the same gross profit.

That's a very different proposition from:

"It's only a 10% discount."

Your break-even point matters

Before setting prices, understand your break-even point.

Imagine:

Monthly fixed costs:

£20,000

Gross margin:

40%

Break-even revenue:

£20,000 ÷ 40%

= £50,000

You need approximately £50,000 of monthly revenue just to cover your fixed costs.

Now imagine your gross margin falls to 30%.

£20,000 ÷ 30%

= £66,667

Your required revenue has increased dramatically.

Nothing about your rent changed.

Nothing about your salaries changed.

Your pricing and margin changed.

That's why margin can be more important than turnover.

Pricing should reflect your business model

There isn't one "correct" pricing method.

Different businesses may use:

Cost-plus pricing

Calculate your cost and add a margin.

For example:

Cost = £60

Target markup = 50%

Price = £90

Simple.

But this approach doesn't necessarily consider what customers are willing to pay.

Market-based pricing

Look at competitor pricing and position yourself accordingly.

Useful - but dangerous if you simply copy competitors.

Your cost structure may be completely different.

Value-based pricing

Price based on the value you create for the customer.

For example, suppose your service helps a business generate an additional:

£100,000 of annual profit.

Charging £5,000 may be commercially reasonable even if your direct delivery cost is only £1,000.

The price is based on value, not simply your cost.

Time-based pricing

Common for:

  • consultants

  • lawyers

  • accountants

  • tradespeople

  • professional services

For example:

£100 per hour

This can be simple to understand.

But it has an obvious limitation:

You are selling your time.

There are only so many hours available.

Fixed-fee pricing

Instead of charging by the hour, you charge:

£2,000 for the project.

This can give customers certainty and allow you to benefit from efficiency.

If you complete the project in 15 hours rather than 25, your effective hourly rate improves.

Subscription pricing

Customers pay:

£X per month

This can create recurring revenue and greater predictability.

It is particularly common for:

  • software

  • gyms

  • memberships

  • retainers

  • maintenance services

  • ongoing professional services

Know your minimum viable price

Every business should understand the lowest price at which it can sustainably sell.

This isn't necessarily your advertised price.

It's your floor.

For example:

Selling price:

£100

Direct cost:

£60

Contribution:

£40

If a customer asks for £65, the sale might look attractive because:

"At least we're making £5."

But you need to consider whether the sale uses capacity that could have generated £40 elsewhere.

This is particularly important when your business has limited capacity.

Contribution margin is useful here

Contribution is broadly:

Selling price − variable/direct costs

For example:

Price:

£100

Variable costs:

£60

Contribution:

£40

That £40 contributes towards fixed costs and profit.

This is useful when comparing:

  • different products

  • different customers

  • different pricing options

  • discounts

  • sales channels

A product with high revenue but low contribution may be less attractive than a smaller product with a much stronger margin.

Not every customer is equally profitable

This is something many SMEs overlook.

You might have two customers:

Customer A

Revenue:

£20,000

Gross margin:

50%

Gross profit:

£10,000

Customer B

Revenue:

£30,000

Gross margin:

20%

Gross profit:

£6,000

Customer B generates more revenue.

Customer A generates more gross profit.

Now consider the time required.

If Customer B also requires twice as much support, Customer A becomes even more attractive.

This is why customer profitability can be more useful than simply measuring customer revenue.

Your cheapest customer may be your most expensive

Imagine a customer who negotiates a 20% discount.

Then:

  • requests frequent changes

  • pays late

  • requires additional meetings

  • needs significant customer support

  • frequently disputes invoices

You may think:

"They're a £50,000 customer."

But the real question is:

"How much profit do we actually make from them?"

A £20,000 low-maintenance customer may be more valuable than a £50,000 high-maintenance customer.

Pricing should account for capacity

Imagine your business has capacity for:

1,000 units per month.

You sell:

1,000 units × £50 = £50,000 revenue

Now demand increases.

You could potentially:

  • increase prices

  • increase capacity

  • hire staff

  • outsource

  • invest in equipment

  • introduce premium products

If capacity is already full, simply selling more isn't necessarily possible.

Pricing becomes a capacity-management tool.

Higher prices can allow you to generate more revenue and profit without increasing volume.

Pricing during periods of rising costs

Costs don't stay still.

Supplier prices increase.

Wages increase.

Rent increases.

Software costs increase.

Insurance increases.

Yet many businesses leave their prices unchanged for years.

This is effectively a real-terms price cut.

Suppose your service cost £1,000 in 2023.

You still charge £1,000 in 2026.

But your costs have increased by 15%.

Your margin has deteriorated even though your headline price hasn't changed.

That's why pricing should be reviewed periodically.

Don't wait until margins collapse

Ideally, pricing shouldn't be reviewed only when:

  • profit falls

  • costs increase dramatically

  • cash becomes tight

  • customers complain

  • the business starts losing money

Instead, make pricing review part of your regular management process.

For example:

Quarterly or annually, depending on your business.

Review:

  • gross margin

  • supplier costs

  • labour costs

  • overheads

  • customer demand

  • competitor positioning

  • capacity

  • customer profitability

The psychology of pricing

Pricing isn't purely mathematical.

Customers don't necessarily choose the cheapest option.

They consider:

  • quality

  • convenience

  • reputation

  • expertise

  • speed

  • service

  • risk

  • results

  • experience

This is why competing purely on price can be dangerous.

If you become the cheapest supplier in your market, someone can eventually become cheaper than you.

Instead, consider:

What makes my business worth paying more for?

The £50 vs £100 problem

Imagine two businesses offer a similar service.

Business A:

£50

Business B:

£100

You might assume Business A will win.

Not necessarily.

If Business B offers:

  • faster delivery

  • better communication

  • greater expertise

  • stronger guarantees

  • better results

  • less hassle

some customers may happily pay twice as much.

This is the foundation of value-based pricing.

How to know whether your prices are too low

There are several clues.

You are consistently fully booked

If demand exceeds capacity, your prices may be too low - or you may need to expand capacity.

Customers rarely negotiate

If every prospect immediately says yes to your quoted price, you may have room to test pricing.

Your margins are shrinking

Your costs may have risen faster than your prices.

You are working harder but earning the same

This is a major warning sign.

Competitors charge significantly more

This doesn't automatically mean you should increase prices.

But it is worth understanding why.

Your business is growing but cash isn't

Low margins can contribute to this problem.

How to increase prices without losing customers

A price increase doesn't have to be dramatic.

Suppose you charge:

£1,000

and increase to:

£1,100

That's a 10% increase.

If your costs remain broadly unchanged, the additional £100 goes largely towards contribution and profit.

For a business with 100 customers, that's:

£10,000 additional revenue per billing cycle

before considering any changes in customer numbers or costs.

Of course, customer response matters.

But don't assume that every price increase will cause customers to leave.

Communicate:

  • what is changing

  • why

  • when

  • what additional value you provide

And give customers reasonable notice where appropriate.

Pricing and VAT

If your business is VAT registered, pricing decisions need another layer of consideration.

For example:

You charge:

£100 + VAT

Customer pays:

£120

The £20 VAT is not your revenue.

It is generally collected on behalf of HMRC, subject to the VAT rules and input tax recovery.

But if you advertise:

£120 including VAT

your net sales value is different.

This matters when comparing:

  • competitors

  • consumer pricing

  • B2B pricing

  • margins

  • discounts

Make sure your pricing model is clear about whether figures are VAT-inclusive or VAT-exclusive.

Don't forget payment terms

Price isn't the only commercial term.

Payment timing matters too.

Compare:

Customer A

£10,000 project

50% upfront

50% on completion

Customer B

£10,000 project

100% payable 90 days after completion

The headline revenue is identical.

The cash-flow profile isn't.

If delivering the project costs you £6,000 upfront, Customer B could create significant working-capital pressure.

So when negotiating, think about:

Price + margin + payment terms

not just price.

Pricing should connect to your budget

Your budget tells you:

How much revenue and profit you need.

Your pricing tells you:

How much you earn from each sale.

Your capacity tells you:

How many sales you can deliver.

Put the three together and you can calculate what needs to happen.

For example:

Target profit:

£100,000

Annual overheads:

£150,000

Gross margin:

50%

Required revenue:

£250,000 ÷ 50%

= £500,000

If you can deliver 5,000 units:

£500,000 ÷ 5,000

= £100 average selling price

Now your pricing has a financial foundation.

The pricing questions every SME owner should ask

Before setting or reviewing prices, ask:

What does it actually cost us to deliver this?

What gross margin do we need?

What fixed costs need to be covered?

What profit do we want to generate?

How much capacity do we have?

How price-sensitive are our customers?

What are competitors charging?

What value are we providing?

Are some customers significantly less profitable than others?

What happens to profit if we increase or decrease prices by 5–10%?

That last question is particularly powerful.

Model different pricing scenarios

Suppose you currently charge:

£100

and sell:

1,000 units

Revenue:

£100,000

Now model three scenarios.

Scenario A - Current price

£100 × 1,000

= £100,000 revenue

Scenario B - 10% price increase

£110 × 950

= £104,500 revenue

You lost 50 sales.

But revenue still increased.

And depending on your costs, profit may increase significantly.

Scenario C - 10% price reduction

£90 × 1,150

= £103,500 revenue

You sold 150 more units.

But you've also created more work.

This is why revenue alone doesn't tell you which scenario is better.

You need to model contribution and capacity too.

The Solutio approach

At SolutioAccounting, we believe pricing should be connected to your wider financial picture.

That means looking at:

  • revenue

  • gross margin

  • contribution

  • overheads

  • capacity

  • customer profitability

  • cash flow

  • break-even

  • budgets

  • scenarios

The objective isn't simply:

"Charge more."

It's:

"Understand what your business needs to earn - and build a pricing model that supports it."

Sometimes the answer will be higher prices.

Sometimes it will be lower prices with greater volume.

Sometimes it will be a different product mix.

Sometimes it will be dropping an unprofitable customer or service.

The numbers help you decide.

The bottom line

More turnover isn't always better.

A £1 million business with a 3% margin may be less attractive than a £500,000 business with a 20% margin.

Don't chase revenue for the sake of a bigger number.

Understand:

What does each sale contribute?

How much capacity does it consume?

Which customers are actually profitable?

What margin do you need?

How much revenue do you need to hit your goals?

And most importantly:

Are you pricing for the business you want to build - or simply pricing to win the next sale?

Because the goal isn't to be busy.

The goal is to build a business that makes money.

Is your pricing actually profitable?

If you're growing revenue but not seeing the profit or cash you expected, your pricing and margins may need a closer look.

SolutioAccounting can help SMEs analyse profitability, margins, break-even points, budgets and financial scenarios to support better commercial decisions.

Know your numbers. Price with confidence. Build for profit.