Why Most Businesses Have a Pricing Problem – Not a Profit Problem

Ask almost any business how things are going, and you’re likely to hear a familiar response:

“We’re busy.”

But here’s the uncomfortable truth: being busy doesn’t always mean being profitable.

In fact, in our experience working with organisations across New Zealand, many appear successful on the surface, but are achieving lower levels of profitability than expected. One factor that frequently contributes to this is pricing strategy.

Most business leaders understand their operations. They know how to deliver a product, complete a project, or serve a client well. However, understanding the financial performance behind that activity can be more challenging.

That gap between activity and profitability matters.

A business that doesn’t fully understand where its money is going, how costs behave, how overheads are absorbed, and what margins are being achieved, is effectively making pricing decisions in the dark.

At the most basic level, every cost in your business falls into two categories, direct costs (product or service) and indirect costs (overheads).

Getting this classification right is the first step. If overheads are not properly understood or allocated, they are mostly under-recovered and that flows straight through to reduced profitability.

A common issue we see is that businesses price for cost recovery, not for profit and risk.

This usually shows up in a few ways, including competing heavily on price, failing to recover overheads, underestimating project or delivery risk, and applying inconsistent or “gut feel” margins.

The result is often lower profitability than expected. You don’t go broke on your good jobs; you go broke on one bad one. 

Markup vs Margin: A Costly Misunderstanding

Another trap many businesses (and in fact most of us) fall into is confusing margin with markup. It’s subtle, but the impact is significant.

For example, if a job costs $85,000 and you “add 20%”, you might think you’ve achieved a 20% margin. But in reality, that only delivers a 16.7% gross margin.

To achieve a 20% margin, you need a 25% markup.

That gap might seem small, but across a year of trading, it can be the difference between a profitable business and one that is constantly under pressure.

Why Small Pricing Changes Have Big Consequences 

Perhaps the most powerful insight for business leaders is that small changes in pricing have a disproportionately large impact on profit.

Take a simple scenario. A project priced at $100,000 generates $20,000 profit (20% margin). Apply a 10% discount - the profit halves to $10,000 and your margin drops to just 11.1%.

To recover that lost profit through volume alone, you would need to double your workload. 

Now flip it the other way. By increasing price by 10%, profit increases by 50%. You could then afford to do fewer jobs and still be better off. In fact, you could take on around one-third less work while achieving the same outcome.

Pricing is the most powerful profit lever in your business.

Margin Matters More Than Volume

There is a natural instinct in business to chase growth, more customers, more jobs, more revenue.

However, growth without margin discipline doesn’t fix a business, it amplifies the problem.

As we often say, more jobs won’t fix poor margins, it will make it worse. Even a small drop in margin can wipe out much of your profit, and one poorly priced job can undo several well-priced ones.

In other words, margin matters more than volume, always.