Ask a room full of NZ business owners whether they are charging enough and most will hesitate. Some will say yes, but quietly wonder. A significant number will admit they probably are not — and have been meaning to do something about it for years.

Underpricing is one of the most common and most costly mistakes in NZ small business. It is also one of the most fixable. But fixing it requires understanding why it happens and what the real cost is.

Why NZ Business Owners Underprice

Fear of losing customers. The most common reason. The assumption is that if you raise prices, customers will leave. In most cases, this fear is significantly overstated. Research consistently shows that customers are less price-sensitive than business owners expect — particularly when the relationship is strong and the service is good.

Cost-plus pricing without knowing the real costs. Many businesses price by adding a margin to their estimated costs. If the cost estimate is wrong — and it often is, for the reasons discussed in our job costing guide — the price is wrong too.

Pricing based on what competitors charge. Competitor pricing is a useful reference point, not a strategy. If your competitors are underpricing, matching them means you are underpricing too.

Not reviewing prices regularly. A price set three years ago may have been right then. Input costs have risen. Wages have increased. The business has more experience and delivers better outcomes. The price has not moved.

Discounting as a default. Some businesses have a stated price and a real price — the stated price is discounted for almost every customer. This erodes margin and trains customers to expect discounts.

The Real Cost of Underpricing

Underpricing is not just a margin problem. It has compounding effects across the business.

It creates a volume trap. When margins are thin, the only way to increase profit is to do more work. More work requires more staff, more equipment, more management time. The business grows in complexity without growing in profitability. The owner works harder for the same net result.

It attracts the wrong customers. Price-sensitive customers are often the most demanding. They negotiate hardest, complain most, and are quickest to leave for a cheaper alternative. Higher-priced businesses tend to attract customers who value quality and relationship — who are easier to work with and more loyal.

It signals lower quality. In many markets, price is a proxy for quality. A business that is significantly cheaper than its competitors may be perceived as lower quality, even when it is not. This can actually make it harder to win the work you want.

It reduces business value. A business with thin margins is worth less than one with healthy margins, even at the same revenue. When you come to sell, underpricing will have cost you not just in annual profit but in the multiple applied to that profit.

How to Assess Whether Your Pricing Is Right

Calculate your true cost per unit or per hour. Before you can know whether your price is right, you need to know your true cost. This means including all direct costs — materials, labour at true cost rate (including on-costs), subcontractors — plus an allocation of overhead. If your price does not cover these costs plus a reasonable margin, it is wrong regardless of what competitors charge.

Calculate your target gross margin. What gross margin do you need to cover your overhead and generate a reasonable net profit? Work backwards from your overhead and profit target to determine the gross margin percentage you need, then check whether your current pricing delivers it.

Review your pricing against industry benchmarks. What do comparable businesses in your sector charge? This is not about matching competitors — it is about understanding where you sit in the market and whether there is room to move.

Identify your most profitable customers. Not all customers are equally profitable. Some pay promptly, require little management, and generate repeat work. Others negotiate hard, pay slowly, and require significant hand-holding. Understanding which customers are genuinely profitable — and pricing accordingly — is more valuable than a blanket price increase.

How to Raise Prices Without Losing Customers

Raise prices for new customers first. New customers have no reference point for your previous pricing. Raising prices for new work while maintaining existing customer rates is a low-risk way to test the market and improve margins on new business.

Give notice for existing customers. A price increase communicated in advance, with a clear reason (cost increases, investment in quality, market adjustment), is received very differently from a surprise invoice. Most customers accept reasonable increases when they are handled professionally.

Increase prices incrementally. A 15% price increase in one step is harder to absorb than three 5% increases over 18 months. Incremental increases are less visible and less likely to trigger a customer review of alternatives.

Add value alongside the increase. If you are raising prices, consider what you can add to the offering at the same time — better reporting, faster turnaround, a service guarantee. This reframes the increase as a value improvement rather than a cost increase.

Be prepared to lose some customers. A small number of customers will leave when you raise prices. In most cases, these are the most price-sensitive customers — the ones with the thinnest margins and the most demands. Losing them often improves overall profitability.

Pricing and Business Value

When a buyer assesses your business, they look at your margins as a signal of pricing power. A business with strong, consistent margins demonstrates that it can charge what it is worth — that customers value the service enough to pay for it, and that the business is not competing purely on price.

A business with thin margins raises the question: is this a structural problem, or a pricing problem? If it is a pricing problem, a buyer will factor in the risk of whether prices can actually be raised under new ownership. If it is structural, the discount is larger.

Improving your pricing — and demonstrating that the improved pricing is sustainable — is one of the most direct ways to increase your business value before a sale.

Getting a Clear Picture

If you are not sure whether your pricing is right, a Business Profitability Review can provide an independent assessment — looking at your margins by product or service line, your pricing relative to costs and benchmarks, and the specific opportunities to improve profitability through pricing changes.

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Ridgeline Advisory is a Christchurch-based business advisory firm helping NZ business owners improve profit, reduce costs and plan succession and exit.

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