For many small business owners, pricing is one of the most difficult parts of running a business. There is often a fine balance between remaining competitive and making sure the work you take on is actually worthwhile. Charge too much and you may worry about losing jobs. Charge too little and you can find yourself working harder, taking on more staff and increasing turnover without seeing the profit you expected.
This is particularly relevant for construction, trades and service businesses, where the cost of delivering work can change quickly. Wages rise, materials become more expensive, vehicles cost more to run, insurance premiums increase and overheads continue to grow.
If your pricing has not kept pace with those changes, your business can become busier while becoming less profitable. August is a useful time to look at this. The new financial year is underway, the end-of-financial-year rush has settled, and there is still plenty of time to make adjustments before another year gathers momentum.
The question worth asking is not simply whether you have enough work. It is whether the work you are doing is generating the return your business needs.
Busy does not always mean profitable
A full calendar can feel like a sign that business is going well. There are jobs booked, staff are busy and invoices are going out. Revenue may even be higher than it was last year. But revenue on its own does not tell the full story. A business can turn over more money while making less profit if the cost of delivering the work has risen faster than its prices. This can happen gradually.
A builder may be quoting jobs using material allowances that no longer reflect current costs. A trade business may be charging the same hourly rate it has used for several years even though wages, superannuation, fuel and vehicle costs have increased. A service business may be spending far more time on administration and client management without factoring that into its fees.
None of these issues necessarily causes an obvious problem overnight. Instead, they slowly reduce the margin on each job. Over time, the owner may notice that the business is extremely busy, but there never seems to be as much cash or profit left over as expected. That is often a signal that pricing deserves a closer look.
The real cost of doing the work
One of the biggest pricing challenges is understanding what a job actually costs. Most business owners are good at identifying the obvious costs. Materials, wages, subcontractors and equipment hire are relatively easy to see. The less obvious costs are often where profitability starts to disappear.
Every business also has expenses that support the work without belonging neatly to one particular job. Vehicles, insurance, software, phones, bookkeeping, administration, tools, licences, rent, storage, marketing and finance costs all form part of the overall cost of running the business.
Those expenses still need to be recovered somehow. If your pricing only covers the direct cost of the job plus a small amount on top, there may not be enough left to cover the broader costs of keeping the business operating. This is particularly important for businesses that rely heavily on labour.
An employee’s hourly wage is not the same as their true hourly cost to the business. There are other employment costs to consider, as well as the reality that not every hour an employee is paid can be billed directly to a customer. Time can be lost to travel, collecting materials, meetings, training, administration and downtime between jobs. Business owners can also underestimate the value of their own time.
Quoting in the evenings, taking customer calls, managing staff, organising materials and dealing with administration are all part of operating the business. If pricing only accounts for time spent physically completing the job, a significant part of the owner’s workload can effectively go unpaid.
When costs rise but prices stay the same
Most businesses have experienced increases in operating costs over recent years. Even when no single increase feels dramatic, the combined effect can be significant. A little more for insurance, a little more for wages, higher software subscriptions, increasing vehicle costs and rising material prices can all add up. If prices remain unchanged while these expenses rise, profit margins inevitably become smaller.
Many business owners are understandably cautious about increasing prices. There is often concern that customers will push back or choose a competitor. But maintaining the same price does not stop your costs from increasing. It simply means the business absorbs the difference.
That can work for a short period, but over time it can make growth more difficult and put increasing pressure on cash flow. A healthy business needs enough margin to cover its costs, pay its owners appropriately and still generate a profit that can be reinvested.
The difference between quoting and job costing
For trades and construction businesses, one of the most valuable things you can do is compare what you expected a job to cost with what it actually cost.
A quote may assume a job will take three days, but in practice it regularly takes four. A material allowance may look reasonable at the time of quoting, but additional items are often needed. Travel time may be underestimated. Small variations may be completed without being charged. Return visits may not be accounted for. Individually, these things can seem minor. Across a large number of jobs, they can have a considerable impact.
This is where job costing becomes useful. Looking back at completed work can show whether your assumptions are realistic. It can also reveal patterns. Perhaps a certain type of job is consistently profitable. Perhaps another type regularly takes longer than expected. Maybe one customer requires so much additional administration that the work is less worthwhile than it first appears. This information can help you make better pricing decisions in the future. It can also help you decide which work you actually want more of.
Not all revenue is good revenue
It can be tempting to measure growth by turnover. Higher revenue can certainly be positive, but only if the work generating that revenue is profitable. Some jobs may create strong margins and relatively little stress. Others can consume significant time, tie up staff, create cash flow pressure and leave very little profit behind.
From the outside, both jobs may look equally valuable because the invoice amount is similar. Financially, they can be very different. This is why understanding profitability by job, customer or service type can be so useful. Sometimes the best way to improve profitability is not to take on more work. It is to be more selective about the work you accept and to price it more accurately. For a business that is already operating close to capacity, this can be particularly important. There is little benefit in filling the calendar with low-margin work if it prevents you from accepting better opportunities.
Discounting can cost more than you think
Price pressure is common, particularly in competitive industries. A customer asks whether you can do the job for less. A larger project comes up and you feel you need to sharpen the pencil. You reduce the quote slightly because you do not want to lose the work. Sometimes that makes commercial sense. But it is important to understand what the discount is actually costing you. If your margin is already relatively tight, even a small reduction in the selling price can remove a significant portion of the profit. The business still has to perform the same work, pay the same wages, use the same vehicles and carry the same overheads. The only thing that has changed is the amount left at the end.
For this reason, discounting should be a deliberate business decision rather than an automatic response to customer pressure. In some cases, it may make more sense to adjust the scope of the work, change the service level or reconsider the payment structure rather than simply reducing the price.
Pricing is also about value
Competitor pricing can be useful information, but it should not be the only basis for deciding what you charge. Another business may have a very different cost structure. They may have fewer staff, lower overheads or different equipment. They may also be underpricing their own work. Customers do not always choose purely on price either. Reliability, experience, communication, professionalism and quality all matter.
For many customers, having someone turn up when they say they will, communicate clearly and complete the work properly has significant value. A sustainable pricing model should reflect both the cost of delivering the service and the value the business provides. Trying to be the cheapest operator in the market can become a difficult position to maintain, particularly as costs continue to increase.
Profit gives the business options
Profit is sometimes treated as whatever happens to be left over after everything else has been paid. A stronger approach is to think about what level of profit the business actually needs. Profit allows a business to invest in new equipment, replace vehicles, employ additional staff, build cash reserves, reduce debt and manage slower periods. It also provides a return to the owner for the time, capital and risk involved in running the business.
Without sufficient profit, a business may be able to keep operating, but it can become difficult to move forward. This is one reason pricing should be connected to broader business goals. If you want to grow the team, invest in better systems or create more financial stability, the business needs to generate enough margin to support those plans.
A small pricing change can make a meaningful difference
Reviewing your pricing does not necessarily mean making dramatic increases across the board. Sometimes the issue is more targeted. You may need to increase the rate on a particular service, allow more labour time when quoting, improve the way variations are charged or stop discounting certain types of work. You may discover that some customers or jobs are highly profitable and others are not. You may simply need better information so you can quote with more confidence.
What matters is that your pricing reflects the business you are running today, not the business you were running several years ago. Costs change. Staffing changes. The type of work you take on changes. Your experience and capability increase. Your pricing should evolve as well.
Is your pricing helping your business move forward? If your business feels constantly busy but the financial results do not seem to reflect the amount of work going through the door, pricing may be part of the problem. That does not automatically mean you need to charge significantly more. It may mean you need a better understanding of your costs, more accurate job costing or clearer information about which work is generating the best return.
August provides a good opportunity to look at this before the financial year gets too far underway. At VBA, we work with Australian businesses to understand the numbers behind their operations and make more informed financial decisions. If you would like a clearer picture of your margins, costs and profitability, speaking with your accountant can be a useful place to start.
This article provides general information only and does not constitute financial, tax, or legal advice. Please consult a registered tax agent or financial adviser for guidance tailored to your circumstances.
