How much should a small business raise its prices?
Quick answer
Raise prices by at least enough to cover your cost increases, then a little more to rebuild margin. For many small businesses, a rise of around 5% is a sensible starting point. Run the numbers first: on a 10% profit margin, a 5% rise can lift profit by half if most customers stay.
How much should you raise your prices?
There is no single right number, but there is a right way to work it out. Start with three questions.
- How much have your costs gone up? If wages, materials, rent and software have risen 6% since your last price change and your prices haven't moved, your margin has quietly shrunk.
- What margin do you need? Profit pays for your own wage, tax, growth and the bad months. Decide what you want to keep from each sale.
- How long since your last rise? If it's been two or three years, you are probably well behind.
A practical rule: lift prices by at least your cost increase, then add a little to rebuild margin. Many owners find a 5% rise is a comfortable first step that customers barely notice.
Small, regular rises, say once a year, are easier on customers than a big jump after years of standing still. They also stop you falling behind again.
If you sell to consumers, remember displayed prices must include GST. Check with your accountant or BAS agent how any change affects your pricing and reporting.
Do customers really only care about price?
It's one of the most common myths in small business: "Our customers only care about price."
Some do. They will always shop around, and you will never win them on value. But most customers care about other things just as much:
- Being looked after and treated well.
- Knowing what happens next and when.
- Not having to chase you for updates, quotes or invoices.
- Feeling confident they've made a good choice.
When those things are obvious, price matters less. When they're missing, price is the only thing left to compare, so customers compare it.
Here's a pattern I see often. An owner loses a few jobs to a cheaper competitor and decides price is the problem. But when they look closer, the lost customers waited four days for a quote and got a bare number with no explanation. The cheaper competitor wasn't winning on price alone. They were winning on speed and clarity.
Before you cut prices or avoid a rise, ask whether you are making the experience easy. That is often cheaper to fix than your margin.
Why is your quote not your offer?
Your quote is a number. Your offer is everything that makes saying yes easy.
Two businesses can quote the same price and get very different results because one has a stronger offer. A strong offer usually includes:
- A guarantee. What happens if something isn't right? Spell it out.
- A clear timeframe. When will you start, and when will it be done?
- A reason to act now. A booking window, limited availability or a start date that suits them.
- Proof you've done it before. Photos, reviews, short case examples or a list of similar work.
Same price, more yeses.
A simple way to strengthen your offer is to write down the three questions customers ask most. Then answer them on your website, in every quote and in your follow-up emails. You'll have fewer back-and-forth calls, and buyers will feel more confident.
This matters for price rises too. When your offer is clear and complete, a higher price feels justified. When it's just a number, every dollar looks like a cost.
Should you package your prices instead of itemising them?
Often, yes. When customers see a long list of separate charges, they pick at every line. Why is this $80? Can we drop that? Itemising invites negotiation.
When they see three clear packages, they choose one. Many pick the middle option, because it feels like the safe, sensible choice.
A common structure is good, better and complete:
- Good: the core service done well. This is your entry point.
- Better: the core plus the extras most customers end up wanting anyway. Price this as your main offer.
- Complete: everything, including priority service or ongoing support. Some customers will always want the best.
This works for a bookkeeper, a cleaner, a web designer, an electrician or a physio clinic. The top package also makes the middle one look reasonable, which helps when your prices go up.
Packaging also lets you lift prices with less friction. Instead of changing twenty line items, you adjust three package prices, and you can add value to a package at the same time so the change feels fair.
How do you tell customers about a price rise?
The fear is that a rise will scare everyone away. Usually a few price-sensitive customers leave and the rest barely notice. Many owners wish they'd done it sooner.
To make it go smoothly:
- Run the numbers first. Know how many customers you could lose and still be ahead. The worked example below shows how.
- Test it on new customers. New customers have no old price to compare. Quote the higher price to your next few enquiries and see how it lands.
- Give notice. Tell existing customers 30 days or more ahead, in writing.
- Explain briefly. Rising costs and keeping quality high are honest, simple reasons. You don't need to apologise or justify every dollar.
- Keep delivering well. The best way to keep customers after a rise is to give them no reason to look elsewhere.
A short message works best: what is changing, when, and why, plus a thank you for their business.
And while you're at it, follow up every quote that's gone quiet. A friendly "just checking if you had any questions" three days after quoting, then again a week later, can win work you'd written off.
What does a 5% price rise do to profit?
Take a small business with these example numbers:
- Sales: $500,000 a year
- Variable costs (materials, direct labour): 60% of sales, so $300,000
- Fixed costs (rent, admin, insurance): $150,000
- Profit: $500,000 minus $450,000 = $50,000, a 10% margin
Step 1: Raise prices 5% and keep every customer. Sales become $525,000. Variable costs stay at $300,000 because you're doing the same work. Fixed costs stay at $150,000. Profit: $525,000 minus $450,000 = $75,000. That is a 50% jump in profit from a 5% price rise.
Step 2: Work out how much work you could lose and still break even. Before the rise, each $1 of work earned 40 cents after variable costs. After the rise, the same work earns $1.05 and still costs 60 cents, leaving 45 cents. To keep your original $200,000 contribution: $200,000 divided by 0.45 = about $444,444 of work at old prices. That's about 11% less work than before.
Step 3: Read the result. You could lose roughly 1 in 9 sales and still make the same $50,000 profit, while doing less work. Lose fewer than that and you are ahead.
The flip side: a 10% discount on the same business drops the 40 cents to 30 cents. You'd need about 33% more sales just to stand still.
Key numbers
| Number | What it is | Why it matters |
|---|---|---|
| Price rise % ÷ profit margin % | Profit lift from a price rise | If no customers leave, a 5% rise on a 10% margin lifts profit by about 50%. |
| Rise % ÷ (contribution margin % + rise %) | Sales you can lose after a rise | With a 40% contribution margin, a 5% rise means you can lose about 11% of sales and break even. |
| Discount % ÷ (contribution margin % minus discount %) | Extra sales needed after a discount | With a 40% contribution margin, a 10% discount needs about 33% more sales to stand still. |
| At least your cost increase | Minimum sensible rise | Anything less means your margin keeps shrinking. |
| 30 days or more | Notice for existing customers | Give it in writing with a short, honest reason. |
| 3 days, then 7 days | Quote follow-up timing | A friendly check-in often wins work that seemed lost. |
Steps to take this week
- Pull last year's sales, variable costs and fixed costs, and work out your current profit margin and contribution margin.
- Use the formulas above to see what a 5% rise would do to your profit and how many sales you could lose and still break even.
- Quote your next three new customers at the higher price and note how each one responds.
- Write down the three questions customers ask most and add the answers to your website and quote template.
- Follow up every quote from the past month that's gone quiet with a short, friendly message.
- Draft a simple price rise notice for existing customers with the new price, the start date and a brief reason.
Frequently asked questions
How often should a small business raise its prices?
Many businesses review prices once a year, often around EOFY or the start of a new calendar year. Small, regular rises are easier for customers to accept than a large jump after several years of no change.
Will I lose customers if I raise my prices?
You may lose a few price-sensitive customers, but most stay if you give notice and keep delivering well. Run the numbers first so you know how many you could lose and still be better off.
Should I explain why my prices are going up?
A short, honest reason helps, such as rising costs or keeping service quality high. You don't need to apologise or justify every dollar, just be clear about what is changing and when.
Is it better to discount or raise prices to grow profit?
For most small businesses, discounting is the harder path because you need a lot more sales to make up the lost margin. A modest price rise with a strong offer usually improves profit faster.
Do I need to include GST in my prices?
If you're registered for GST and sell to consumers, the price you display generally needs to include GST. This is general information only, so check with your accountant or BAS agent about your situation.