Why Your Prices Deserve an Annual MOT

Most small business owners set their prices once, usually in a flurry of excitement when they first start trading, and then quietly hope for the best. Three years later, the website still shows the same numbers while everything around them has shifted. Insurance has renewed at a higher premium. Card processing fees nibble at every transaction. Packaging, fuel, software subscriptions and the National Living Wage have all crept upwards.

The result is a business that looks busy but feels broke. Turnover is healthy, the bank balance isn't, and you find yourself working longer hours to stand still. A proper pricing review, done once or twice a year, is one of the highest-return activities available to a small business. It doesn't require complex software or a finance degree, just a couple of hours, a spreadsheet and a willingness to have slightly awkward conversations.

Start With the True Cost of What You Sell

Before you can judge whether a price is right, you need to know what each sale actually costs you. Split this into two parts. Direct costs are the obvious ones: materials, stock, subcontractor fees, delivery, payment processing. Indirect costs, or overheads, are everything else: rent, utilities, insurance, accounting fees, marketing, software, your phone and broadband, plus a realistic figure for your own time.

The simplest way to absorb overheads is to work out an hourly rate. Suppose your annual overheads come to £60,000 and you have roughly 1,000 billable hours a year available after admin, quoting and holidays. That's £60 of overhead per billable hour. If you want to pay yourself £30,000 for those 1,000 hours, your break-even rate is £90 an hour. To build in a 15% net margin, you'd charge about £106 — round it to £110 and you have a defensible, profitable price.

Do this exercise for each main service or product line, because they rarely carry the same cost structure:

• Labour-heavy services — check that your charge-out rate reflects the real hourly cost of employing or paying yourself, including pension contributions and holiday cover.
• Product sales — include inbound freight, duties, wastage and the cost of returns, not just the purchase price.
• Retainers and subscriptions — track the actual hours delivered each month. If a £500 retainer consistently takes twelve hours, you're selling at £41 an hour.

If a line can't cover its costs plus a sensible margin after a fair review, either reprice it or stop selling it. Carrying a loss-making service for sentimental reasons is expensive sentiment.

Competitor Rates Are Context, Not a Ceiling

It's sensible to know what others charge, but don't let their numbers dictate yours. A competitor may have lower overheads, a different business model, or simply be on their way to a cash-flow crisis. What matters is what's included in the price: notice periods, minimum order values, travel charges, revision rounds, response times.

Pull together a short comparison of three or four businesses in your market. Note their headline prices and the terms around them. You'll often find a gap you can occupy — perhaps you're slightly more expensive but include something they charge extra for, such as a follow-up visit or a named point of contact. That positioning is far more sustainable than being the cheapest option in town.

What Your Customers Actually Value

Pricing is as much about perception as arithmetic. Ask a handful of your best customers why they chose you and what would make them leave. Their answers usually reveal where you're undercharging. Speed, reliability, specialist knowledge and peace of mind are all worth a premium — and rarely appear on a competitor's price list.

Consider structuring your offering into three tiers: a straightforward core option, a recommended middle package, and a premium tier with extras. This lets customers self-select and often lifts average order value without any hard selling. Existing clients can be grandfathered onto old prices for a set period, with clear notice of what changes and when.

Communicating an Increase Without Losing Customers

The fear of an increase is usually worse than the reality. Most customers accept a well-explained rise; what they dislike is a surprise. Give proper notice — 30 days for business clients, and longer for consumers where a contract requires it — and keep the message short.

• State the new price and the date it takes effect, in the first two lines.
• Give one honest reason: rising supplier costs, investment in staff, improved turnaround times.
• Offer a route to lock in the current price, such as prepaying for six months or committing to a longer term.
• Thank them for their custom and make it easy to reply with questions.

Also tighten your discount discipline. Cap how much any team member can discount, time-limit introductory offers, and never discount without asking for something in return, whether that's a longer contract, a testimonial or a referral.

Turning the Review Into a Habit

Diary two pricing reviews a year, and keep a simple file recording every cost change as it happens. Once a quarter, glance at gross margin by service line rather than just total revenue. If a key cost moves by more than 5–10%, revisit the affected prices immediately rather than waiting for the next review.

Track what happens after a change: conversion rate, average order value, and how many customers actually leave. You'll usually find the churn is smaller than you feared and the margin improvement arrives quickly. Pricing isn't a one-off decision; it's a habit that keeps your business steady, sustainable and properly paid for the work you do.