Why Most Small Business Owners Underprice Without Realizing It
If you’ve ever asked yourself, “Am I charging enough?”—you’re not alone. This is one of the most searched questions among small business owners.
Underpricing rarely comes from laziness or lack of effort. It usually comes from uncertainty. Many owners base pricing on competitors, gut instinct, or what they think customers will tolerate. Others raise prices reactively when cash feels tight, without fully understanding the numbers behind the decision.
The problem is that pricing affects everything—profitability, stress levels, growth potential, hiring decisions, and how customers perceive your value. When pricing isn’t grounded in data, your business may survive, but it rarely thrives.
Pricing Is More Than Covering Costs
A common mistake is assuming that pricing only needs to cover direct costs plus “a little extra.” While covering costs is essential, pricing must also support:
- Overhead and fixed expenses
- Owner compensation
- Reinvestment into the business
- Downtime, inefficiencies, and seasonality
- Growth and scalability
For business owners selling physical products, pricing requires careful consideration of every cost your business incurs, not just the cost of materials or the product itself. That includes:
- Product cost (wholesale or manufacturing)
- Packaging and shipping
- Storage and inventory holding costs
- Equipment or point-of-sale expenses
- Overhead like rent, utilities, and insurance
- Marketing and advertising
- Employee wages and benefits
- Administrative and operational expenses
- Any other operating costs necessary to run your business
If you only price based on the cost of the product itself, you risk undercharging and eroding profitability. Your price must cover all of these costs while leaving a margin that allows you to reinvest, grow, and handle unexpected expenses.
Tip for Retail Business Owners: Think of pricing as a way to recover every expense and generate sustainable profit, not just as a markup on the product. Every dollar counts toward keeping your business healthy and competitive.
Understanding the Foundation of Pricing
Before adjusting prices, you need clarity in three areas:
1. Your True Cost Structure
This includes more than materials and labor. It also includes rent, insurance, equipment payments, software, admin time, marketing, fuel, repairs, and owner involvement. Every cost, including those that seem indirect, needs to be accounted for in pricing.
2. Capacity and Utilization (Services Only)
Capacity is what your business could produce. Utilization reflects what actually happens day to day for services. For service-based businesses, utilization typically applies to:
- Labor hours
- Crews or teams
- Equipment or vehicles
- Billable time versus available time
Non-utilized capacity includes anything that consumes time or resources without directly generating revenue—travel gaps, scheduling inefficiencies, waiting on materials, weather delays, administrative work, or idle equipment.
3. Value Delivered
Pricing should reflect outcomes, not just effort. Customers don’t pay for time—they pay for results, reliability, and peace of mind. For retail products, this also reflects quality, brand perception, and convenience.
For products, this also means understanding unit economics—the profit per item after all costs, from product sourcing to marketing and operations. For example, if your product cost is $40, but marketing, packaging, shipping, and overhead add another $9,000 per month, your minimum selling price should exceed that cost to break even. Pricing lower than this may increase sales volume but will drain cash flow and threaten sustainability.
Retail owners must balance volume, margin, and market positioning. Sometimes selling fewer high-margin items is more profitable than selling many low-margin items, even if total revenue appears higher.
Utilization Explained: What It Really Means for Your Business (Services Only)
Utilization measures how much of your available capacity is actually producing revenue. Capacity is what your business could deliver if everything ran perfectly. Utilization reflects what actually happens day to day.
For service-based businesses, utilization typically applies to:
- Labor hours
- Crews or teams
- Equipment or vehicles
- Billable time versus available time
Non-utilized capacity includes anything that consumes time or resources without directly generating revenue—travel gaps, scheduling inefficiencies, waiting on materials, weather delays, administrative work, or idle equipment.
Utilization isn’t about pushing people or assets to their limits. It’s about understanding how efficiently your business converts capacity into revenue.
How to Calculate Utilization (Services)
Utilization (%) = (Revenue-Generating Time ÷ Total Available Time) × 100
What Different Utilization Rates Actually Mean
- Below 60% Utilization: Signals inefficiency or weak demand. Fixed costs are spread across too little revenue, putting pressure on cash flow.
- 60–75% Utilization: A growing business range. Some unused capacity exists; improvement opportunities include better scheduling or marketing.
- 75–85% Utilization: Healthy operating range. Revenue is strong, room exists for variability, and growth is manageable.
- 85–90% Utilization: High demand, efficient execution, but operational pressure increases. Expansion planning should begin.
- 100% Utilization Is Not Healthy: No margin for error, risk of burnout, and fragile operations.
Good Target: 75–85% utilization balances strong margins with flexibility.
How to Know If You’re Actually Charging Enough
Indicators that pricing may be too low include:
- Busy schedules but tight cash flow
- Growth adding stress instead of relief
- Hesitation to hire despite strong demand
- Reliance on volume instead of margin
- One bad month causing financial pressure
For retail, signs of underpricing include frequent stockouts without profit gains, consistently low margins, or the need to sell high volume just to cover fixed costs. Correct pricing balances volume and margin to support sustainable growth.
Retail Pricing Scenario: Understanding the Impact of Discounts
Let’s break this down with a simple example for a T-shirt business:
Assumptions (per month):
- Indirect costs: $9,000 (rent, utilities, marketing, insurance, admin – triple the previous example)
- Direct cost per T-shirt: $40 (double the previous example)
- Selling price: $95
Break-Even at Full Price: How Many T-Shirts Do You Need to Sell
Break-even quantity = (Indirect Costs ÷ (Selling Price – Direct Cost))
= $9,000 ÷ ($95 – $40)
= $9,000 ÷ $55
≈ 164 T-shirts
So, you need to sell 164 T-shirts at $95 each to cover your indirect and direct costs.
Break-Even with Discounts: How a Discount Changes How Many T-Shirts You Need to Sell
Discounted price = $95 × 85% = $80.75
Market Campaign for Discount Sale: $1,000
Break-even quantity = $10,000 ÷ ($80.75 – $40)
= $10,000 ÷ $40.75
≈ 246 T-shirts
This shows that even a moderate discount significantly increases the number of units you must sell to break even and brings the question: Is the marketing campaign worth it?
Important Note: Sometimes creating large discounts is necessary in the trade. If a product didn’t perform well, offering a deep discount can help you recover your investment and reinvest in something more profitable. The key is being intentional—know the cost of the item, the impact on your margins, and use the strategy strategically to maintain overall profitability.
Next Steps for Small Business Owners: How Oakridge Consulting Can Help
At Oakridge Consulting, we work with small business owners who are capable, busy, and ambitious—but unsure if they’re charging enough or maximizing profitability. We help you:
- Build a pricing strategy grounded in your true costs, indirect expenses, and margins
- Analyze service utilization and operational efficiency to ensure you’re maximizing your revenue potential
- Evaluate your product and service mix to identify high-margin opportunities and underperforming offerings
- Implement strategic discounting practices so promotions improve cash flow without eroding profitability
- Forecast revenue and profit scenarios so you can make data-driven pricing and operational decisions
- Identify hidden costs and inefficiencies that may be eating into profits
- Optimize retail and service pricing to cover all costs and maximize sustainable margins
- Monitor trends and adjust prices proactively instead of reactively
Our goal is to help you price confidently, maximize profit, and make decisions based on data instead of guesswork. With the right guidance, you’ll stop undercharging, reduce stress, and grow your business sustainably.
