Your P&L can show a healthy profit while one of your offerings quietly loses money. When you only look at the totals, strong sellers hide weak ones. A service you’re proud of, or a product customers love, may be eating the profit your other work produces. Pricing is where profitability is decided, and most owners set it once and rarely look at it again.
This is a different question from reading your financial statements. Instead of asking “how did the business do?”, you’re asking “does each thing I sell actually earn its keep?”
Margin vs. Markup: The Mix-Up That Costs Money
These two terms get used interchangeably, and they aren’t the same. Markup is the percentage you add on top of your cost. Margin is the percentage of the selling price that you keep.
If something costs you $60 and you add a 50% markup, you charge $90. Your margin on that sale is only 33%, not 50%. To earn a true 50% margin, you’d need to charge $120. Owners who price by markup while thinking in margin consistently undercharge, sometimes without realizing it for years.
A simple formula fixes this: Price = Cost ÷ (1 − Desired Margin). At a $60 cost and a 50% target margin, that’s $60 ÷ 0.50 = $120.
Know Your True Cost
Margins are only as accurate as your cost figures. Most owners undercount in these areas:
- Labor. Use the fully loaded cost: wages, payroll taxes, and benefits, not just the hourly rate. For your own time, assign a realistic hourly value, even if you don’t pay yourself that way.
- Direct costs. Materials, packaging, shipping, subcontractors, software tied to the work, and payment processing fees.
- Time that isn’t billable. Revisions, client emails, scope creep, and returns all consume hours or dollars without adding revenue.
A Tale of Two Projects
Say you sell a $2,000 service package. You estimated 25 hours of work at a loaded labor cost of $45 per hour, plus $75 in software and direct costs. That’s $1,200 in cost and an $800 margin, or 40%.
Now say a client keeps requesting changes and the same project takes 40 hours. Labor jumps to $1,800, total cost to $1,875, and your margin falls to $125, about 6%. Same price, same client, very different result. This is why tracking actual time against what you quoted is one of the most useful habits in a service business.
For products, the same logic applies. If something sells for $50 and costs $22 to buy, $6 to package and ship, and $1.50 in card fees, you keep $20.50, or 41%. That’s before rent, software, and your own pay. If your overhead consumes more than that margin across your sales, the product is growing revenue, not profit.
Questions to Ask About Every Offering
- What does it actually cost me to deliver, with everything included?
- How does the margin compare to my other offerings?
- How much of my time or capital does it use relative to what it earns?
- Has my price changed since my costs last went up?
- Would I choose to sell this at this price if I were starting today?
What to Do With What You Find
Low margin doesn’t automatically mean you should drop something. Some offerings bring in customers who buy higher-margin items later. But you should make that choice on purpose. Your options usually include raising the price, reducing delivery costs, tightening scope or setting limits on revisions, bundling a weak seller with a strong one, or phasing out the offering. Even a modest price increase can matter a great deal: on a 40% margin, a 5% price increase boosts profit on that sale by more than 12%, assuming costs stay the same and volume holds.
The Bottom Line
Revenue tells you what’s coming in, and margin tells you what you keep. Knowing your true cost and margin on each service or product turns pricing from a guess into a decision. Set aside an hour this quarter to run the numbers on your top offerings. Before year-end is a good time, because it lets you enter the new year with prices that reflect what the work really costs.
