A business can be flat out and still struggle to pay its owner properly. Sometimes the answer is more work. Sometimes each extra job repeats a pricing problem that already exists.
Before chasing the next sales target, look at what remains after delivering the sale. That amount has to support rent, administration, management time, unexpected problems and a return for the owner. A growing top line can disguise very little room underneath.
Three calculations help: markup, margin and break-even. They use the same numbers in different ways, so mixing them up can produce a price that looks better on paper than it feels in the bank.
Markup and margin are different percentages
Suppose a fictional product costs $100 to supply and sells for $150, excluding GST. The $50 difference is a 50% markup on cost. It is a 33.3% margin on the selling price.
To earn a 40% margin on that $100 cost, divide $100 by 60%. The required price is $166.67, subject to rounding. Simply adding 40% produces a $140 price and a margin of only 28.6%.
This distinction matters when quotes are prepared by several people. Write the formula into the pricing process so “our normal margin” means the same thing to everybody. The Queensland Government’s financial ratio guidance explains gross margin as a measure relative to revenue.
The discount comes out of what is left
Consider a fictional service package priced at $1,000. Its variable delivery cost is $600, leaving a $400 contribution towards fixed costs and profit. Monthly fixed costs are $12,000. All figures in this example exclude GST.
| Measure | Usual price | 10% discount |
|---|---|---|
| Price per package | $1,000 | $900 |
| Variable delivery cost | $600 | $600 |
| Contribution per package | $400 | $300 |
| Packages to cover $12,000 fixed costs | 30 | 40 |
| Packages to cover fixed costs and earn $4,000 profit | 40 | 54, rounded up |
The 10% price discount reduces contribution by 25%. To preserve the original $16,000 total contribution from 40 packages, the business needs 53.33 discounted packages, or 54 whole packages. That is 35% more packages after rounding.
The arithmetic assumes the delivery cost stays constant and the extra work does not require more fixed capacity. If the additional volume triggers another employee, more equipment or weekend penalties, the target moves again.
Use contribution for the decision you are making
Gross profit and contribution are related, but they are not automatically interchangeable. A gross profit report follows the business’s accounting classifications. A contribution calculation focuses on costs that change with the particular sale or decision.
For example, a salaried team member may be a fixed cost in the short term when you are deciding whether to accept one extra job. Their time still has a limit and an alternative use. Over a longer period, the business must earn enough to cover that salary and replace capacity when needed.
Include merchant fees, freight, subcontractors, consumables, commissions and predictable rework where they arise from the sale. For service firms, inspect the actual delivery hours rather than the optimistic hours used in the original quote.
Break-even is a starting point for judgement
For a single product, break-even volume is fixed costs divided by contribution per unit. For a mixed business, a contribution margin percentage can provide a useful overall estimate, provided the sales mix is reasonably stable.
A business with $20,000 monthly fixed costs and a 40% contribution margin needs $50,000 sales to break even. If the sales mix shifts towards work with a 30% contribution margin, the required revenue rises to about $66,667. The overheads have not changed; the quality of the sales has.
The business.gov.au pricing guide considers costs alongside customer value and market conditions. Your spreadsheet can show the economics of a price, but it cannot prove that customers will accept it. That needs evidence from your market.
Change the offer before apologising for the price
If customers resist a fee, examine scope, turnaround, payment timing and service levels. A smaller package may genuinely cost less to deliver. A blanket discount for identical work may simply transfer your remaining margin to the customer.
Review recent jobs by actual hours, contribution and follow-up effort. You may find that a particular customer group, delivery method or vague scope creates the problem. Use that evidence to improve the next quote rather than assuming the entire business needs a price increase.
Choose a few changes you can measure: a revised minimum fee, clearer variations, a deposit arrangement or removal of an unprofitable extra. After a month, compare acceptance rates, delivery time and contribution. A good pricing decision should improve the business you are running, not merely the revenue line you report.
Sources and further reading
Target Advisory 