How to Know When You're Underpricing

Calculate if your prices are too low using margin analysis, competitor benchmarks, and customer behavior signals.

1. Calculate your true gross margin. Take revenue minus direct costs (materials, labor, shipping) and divide by revenue. If you're below 40% in most service businesses or 20-30% in retail, you're likely underpricing. Include all direct costs—many operators miss freight, payment processing fees, or subcontractor markups.
2. Track your quote acceptance rate. If more than 80% of prospects accept your initial quote without negotiation, you're leaving money on the table. Healthy businesses see 60-70% acceptance rates with some pushback. Log this for 30 days minimum to get reliable data.
3. Benchmark against local competitors. Call 5-7 competitors as a mystery shopper or check their published rates. If you're more than 15% below the market median, you're underpricing unless you're deliberately competing on cost. Factor in service level differences—don't compare premium to budget.
4. Measure demand versus capacity. If you're booked 3+ weeks out but still struggling with cash flow, your prices aren't matching demand. Calculate revenue per available hour or unit of capacity. Raise prices 10-20% on new customers and track the demand response.
5. Check customer lifetime value trends. Calculate average customer spend over 12 months. If it's flat or declining while your costs rise 3-8% annually, you need price increases. Profitable businesses raise prices annually to maintain real margins.
6. Test price sensitivity with new prospects. Quote 15-25% higher to new customers for 30 days. If acceptance rate only drops 10-20%, you found your pricing power. Existing customers get current rates during the test to avoid disruption.