Raising Prices: How Many Sales Can You Afford to Lose?

Many small businesses put off raising prices because they fear losing customers. The arithmetic usually favours the rise. Because a price rise goes straight to profit, you can lose a surprising share of sales and still make the same gross profit as before.

Discounts work the other way: a small price cut needs a large increase in sales just to stand still.

The formulas

Contribution margin is the share of the price left after variable costs: (price − variable cost) ÷ price.

Both percentages are in the same units: for a 5% rise on a 35% margin, 5 ÷ (35 + 5) = 12.5%.

Worked example

A small manufacturer sells 2,000 units a year at £100 each. The variable cost of each unit is £65.

• Contribution margin: (£100 − £65) ÷ £100 = 35%.
• Gross profit now: £35 × 2,000 = £70,000.
• A 5% rise to £105: if no sales are lost, gross profit is £40 × 2,000 = £80,000, which is £10,000 more.
• Sales it could lose: 5 ÷ (35 + 5) = 12.5%, or 250 units, and still make £70,000. Check: £40 × 1,750 = £70,000.
• A 5% cut to £95 instead: it would need 5 ÷ (35 − 5) = 16.7% more sales to make the same profit. Check: £30 × 2,333 = £70,000 (to the nearest unit).

The lower your margin, the stronger this effect. On a 20% margin, a 5% rise could lose 20% of sales and break even, while a 5% cut would need a third more sales.

Test your own price rise

Raising prices without losing customers

• Start with the least price-sensitive work. Repeat customers, urgent jobs and specialist work usually notice least.
• Give notice. Tell customers in advance, with a short, honest reason such as rising costs, so the new price is not a surprise on an invoice.
• Raise regularly and modestly. A small rise each year is easier to accept than a big jump every five years.
• Don't apologise. State the new price clearly.
• Measure what happens. Track sales, quote conversion and lost customers for three months, and compare the actual loss with the figure above.

When a rise is not the answer

If customers can easily buy the same thing elsewhere for less, and they choose on price alone, a rise may lose more than the calculation allows. In that case, look at costs, or at what you could add that customers would pay more for.