Pricing for Profit: How to Stop Undercharging for Your Services

Most small business owners are undercharging for their services. Not by a little. By a lot.

They set their prices years ago based on what felt comfortable, what competitors seemed to charge, or what they thought clients would pay. Then they never raised them, even as their costs increased, their expertise grew, and their value to clients multiplied.

The result? They're busy all the time but barely profitable. They work harder than ever but can't figure out why there's nothing left at the end of the month. They resent their best clients because every project feels like they're giving away their work.

If this sounds familiar, the problem isn't your work ethic. It's your pricing strategy.

Here's how to price for profit instead of just for survival.

Why Most Business Owners Underprice

Before fixing your pricing, it helps to understand how you got here. Most underpricing comes from one of these traps:

The competitor trap: You looked at what others charge and priced yourself similarly, or slightly below to be "competitive." But you don't know their cost structure, their profit margins, or whether they're even making money. Matching a competitor who's losing money just means you'll lose money too.

The comfort trap: You priced based on what felt comfortable to say out loud, not based on what your services are worth or what you need to charge to be profitable. Comfort is not a pricing strategy.

The fear trap: You're afraid that if you charge more, clients will say no. So you keep prices low to avoid rejection. But low prices attract price-sensitive clients who are the hardest to please and most likely to leave for someone even cheaper.

The cost-plus trap: You calculated your costs, added a small markup, and called it a price. But cost-plus pricing ignores the value you create for clients. A plumber who fixes a burst pipe in 30 minutes isn't selling 30 minutes of labor. They're selling a dry house and peace of mind.

Recognizing which trap caught you is the first step toward escaping it.

The True Cost of Underpricing

Underpricing doesn't just hurt your profits. It creates a cascade of problems that affect every part of your business:

• You can't invest in growth. Marketing, hiring, equipment, training... all require capital. When margins are thin, there's nothing left to reinvest.

• You can't afford to say no. Low margins mean you need every client, even the difficult ones. You become a hostage to anyone willing to pay.

• You attract the wrong clients. Price signals quality. Low prices attract bargain hunters. Premium prices attract clients who value quality and are willing to pay for it.

• You burn out. When you're not making enough per project, you compensate by taking on more projects. More work at low margins is a recipe for exhaustion.

• You can't pay yourself properly. Owner compensation comes from profit. No profit means you're subsidizing your clients' low prices with your own unpaid labor.

The irony is that underpricing often leads to worse service. When you're stretched thin and resentful, the quality of your work suffers. Your best-paying clients end up subsidizing your worst ones.

How to Calculate What You Actually Need to Charge

Profitable pricing starts with understanding your numbers. Here's the framework:

Step 1: Know Your True Costs

Most business owners dramatically underestimate their costs. They think about direct costs (materials, subcontractors) but forget overhead:

• Rent, utilities, insurance

• Software subscriptions and tools

• Marketing and advertising

• Professional fees (accounting, legal)

• Vehicle expenses

• Continuing education and training

• The time you spend on admin, sales, and unbillable work

Add up all your annual overhead, then divide by your billable hours. That's your true hourly cost before you've made a dime of profit.

Step 2: Determine Your Target Profit Margin

Profit isn't what's left over. It's what you build into the price intentionally.

A healthy service business should target at least 15-25% net profit margin. This provides:

• Cash reserves for slow periods

• Capital for growth and investment

• Proper owner compensation

• Cushion for unexpected expenses

If you're currently at 5-8% margins (or worse, breaking even), your prices are too low.

Step 3: Factor In Owner Compensation

What would you have to pay someone else to do your job? That's the minimum you should be earning. Many business owners pay themselves last, treating their own labor as free. It's not.

If you'd have to pay a manager $80,000 to run your business, and you're currently paying yourself $40,000, you're underpricing by at least $40,000 per year.

Step 4: Work Backward to Your Price

Now combine these elements:

Total Revenue Needed = (All Costs + Target Owner Compensation) ÷ (1 - Target Profit Margin)

Example: If your costs are $150,000, you want to pay yourself $100,000, and you're targeting 20% profit margin:

Revenue Needed = ($150,000 + $100,000) ÷ (1 - 0.20) = $312,500

If you can handle 50 projects per year, each project needs to average $6,250. If you're currently charging $4,000 per project, you've found your pricing gap.

Value-Based Pricing: Charging What You're Worth

Cost-based pricing tells you the minimum you can charge. Value-based pricing tells you what you should charge.

The question isn't "How much does this cost me to deliver?" It's "How much is this worth to the client?"

Consider:

• What problem are you solving? The bigger the problem, the more valuable the solution.

• What's the cost of not solving it? A roof leak that causes $20,000 in water damage makes a $2,000 repair look like a bargain.

• What results do you create? A marketing consultant who helps a client add $200,000 in revenue is worth far more than their hourly rate suggests.

• What expertise do you bring? Years of experience, specialized knowledge, and professional judgment have value beyond the hours spent.

Value-based pricing requires confidence. You have to believe you're worth what you charge. If you don't believe it, clients won't either.

How to Raise Your Prices

Knowing you need to charge more is one thing. Actually doing it is another. Here's how to approach it:

Start with new clients. New clients have no anchor price. They'll accept your current rates as normal. This is the easiest place to test higher pricing.

Phase in increases for existing clients. Don't surprise loyal clients with a sudden 50% increase. Give notice, explain the change, and phase it in over time. Most will understand. Some won't, and that's okay.

Raise prices when you raise value. Adding new services, certifications, or capabilities? That's a natural time to adjust pricing. Tie the increase to the increased value.

Don't apologize. State your prices with confidence. If you hedge, discount, or apologize, you're signaling that even you don't think your prices are justified.

Expect to lose some clients. Not every client will accept higher prices. That's fine. The clients you lose were probably your least profitable ones anyway. The ones who stay will be more profitable, and you'll have capacity for better clients.

Signs Your Pricing Strategy Is Working

How do you know if you've priced correctly? Watch for these signals:

• You're winning about 50-70% of proposals. If you're closing 90%+, you're probably too cheap. If you're closing 20%, you might be too expensive (or targeting the wrong clients).

• You can afford to say no. When margins are healthy, you can turn down bad-fit clients without financial panic.

• You're hitting your profit targets. If you set a 20% margin target and you're hitting it, your pricing is working.

• You can pay yourself properly. Owner compensation at market rates is a sign of a healthy business.

• You're attracting better clients. Higher prices tend to attract clients who value quality over price. They're easier to work with and more likely to refer others.

The Bottom Line on Pricing

Your prices aren't just numbers on a proposal. They're a statement about the value you create, the business you want to build, and the life you want to live.

Underpricing keeps you trapped: working too hard, earning too little, and serving clients who don't value what you do. Profitable pricing gives you freedom: the freedom to invest in growth, to say no to bad fits, and to build a business that actually supports your life.

If you haven't reviewed your pricing in the last year, it's time. Look at your costs, your margins, your owner compensation, and the value you create. Then price accordingly.

The clients who value what you do will stay. The ones who don't weren't your ideal clients anyway.

Related Posts

Pricing is one piece of your overall financial strategy. These guides can help you see the bigger picture:

→ How to Read a Profit & Loss Statement Like a CEO

Understanding your P&L is essential for setting prices that actually produce profit.

→ How to Set Financial Goals for Small Business

Pricing should support your financial goals. Start with clarity on what you're trying to achieve.

→ Understanding Owner's Draw vs Salary

If your pricing doesn't support proper owner compensation, something needs to change.

→ How to Improve Cash Flow Management for Small Business

Better pricing leads to better cash flow. Learn how to manage both.

Not Sure If Your Pricing Is Right?

At Bottomline Capital, we help business owners understand their true costs, set profitable prices, and build the financial clarity to grow with confidence. Our fractional CFO services include pricing analysis, margin improvement, and the strategic guidance to charge what you're worth.

📅 Book a Free Consultation to discuss your pricing strategy and how we can help you build a more profitable business.