The issue
I worked with a service business owner who had been putting her prices up for years.
She was charging more, bringing in more revenue and attracting bigger clients. But she couldn't understand why she wasn't keeping more money.
So we took one client account and priced what it actually cost to serve.
Two years earlier she'd charged that client $4,000 a month. Now she was charging $5,000. A 25% increase.
Except the work had changed. More meetings. More revisions. More team members involved. And quite a bit of her own time that nobody was tracking.
That client was costing her $4,600 a month to serve. At the old price she'd kept roughly $1,200. Now she kept $400.
She'd put her price up by $1,000, and the cost of the work had gone up by $1,800.
The claim: raise your prices before you know where the costs landed, and you charge the wrong clients for them.
The case before us
This is the question in front of owners setting next year's prices. My costs went up and my margins shrank. What do I do first, and who should I talk to before I reprice?
Start with a sort. The price comes after.
Exhibit A: everyone is repricing
In September, the National Federation of Independent Business asked its members whether their average selling prices had gone up.
38%.
That is the share who said yes. A net 31% plan to raise prices again in the next three months, against a long-run average of 22%. One owner in five named inflation as the single biggest problem in their business, where the long-run figure is 7%.
So the instinct is common, and it is sound. Costs went up and something has to give. In case no. 006 I wrote about the third of owners who let it give in their own pay. A price rise is the better answer.
A rise on every client is still a guess about where the cost went.
(The NFIB survey covers every kind of small business, not only service firms, and 411 owners answered it. Read it as the weather, never as your own numbers.)
Exhibit B: costs rise unevenly
In a service business, a cost belongs to a particular kind of work. A contractor works on two of your clients. One piece of software runs one service.
When one of those costs rises, the margin on that work falls and the rest stays where it was.
Say a contractor makes up a fifth of what one service costs you to deliver, and she puts her rate up 10%. Delivering that service now costs you 2% more. Every other service costs what it did.
Now put 10% on every client. The clients on the untouched work pay more for something that did not change. The clients on the work that got dearer may still be underpriced, because the rise was never sized to their work.
The shrink sits in a few services, and the totals hide which ones.
Exhibit C: the order to work in
1. List every cost that went up this year. Against each one, write the service or client it belongs to. Anything that belongs to everything goes in overhead.
2. Work out the margin on each service again, with this year's costs in it.
3. For each service that fell below the margin you are aiming for, choose: cut a cost inside that service, or raise that service's price.
4. Then check which of your prices haven't moved since 2024.
In case no. 007 I argued that paying yourself on a fixed date shows you the shortfall while you can still change a price or a cost. This is how you choose which.
It also answers the second half of the question. Repricing needs your costs split by service and by client, and set against the margin you want. Whoever you talk to before you reprice, your accountant included, ask them for that split.
The verdict
My costs went up and my margins shrank: what do I do first? Find where the rises landed before you change a price. In a service business, costs belong to particular work, so a rise shrinks some margins and leaves the rest alone. Re-cost each service with this year's numbers, then raise the price or cut the cost only where the margin fell short. In the Profit M.A.P, the framework I use with clients, that is the Profit Leak step.
What to do with this
One cost, one service.
Take your biggest cost rise this year.
Write down which service it belongs to.
Work out what that service cost you to deliver last year, and what it costs now. By how many points did its margin move?
Next: case no. 009.
P.S. If you couldn't say which service the rise landed on, that is the finding. The Profit Scan is my read of your numbers. It shows what each part of the business brings in and costs, and where the profit goes before it reaches you. $297. No call: See where your profit goes
One question, and a one-line answer is all it takes: what was your biggest cost rise this year?
Until next Sunday,
Anwin
Anwin Mbah spent 20 years building the systems inside HSBC, Natixis and Zurich that let institutions see their money. A Case for Profit applies that discipline to yours. Wealthfluency is the practice behind it. The Profit Scan is where owners start, at $297, and the Audit and Advisory are what follow.
Know a business owner who wants to make more and keep more? Forward this.