Offer more, honestly · Every business
How Many Customers You Could Lose and Still Earn More After a Price Increase
One short formula, built from the size of the increase and the margin on each sale, tells an owner how many customers can walk away before a price increase stops paying for itself, and the answer is usually far larger than the number they fear.
At a glance
- The break-even loss is the share of customers or jobs a business can lose after a price increase and still earn the same margin as before: price increase ÷ (margin + price increase).
- At a 40% margin, a 7% increase could lose about one job in seven and earn the same; a 10% discount at the same margin would need a third more jobs just to stand still.
- For an illustrative trades business doing 60 jobs a month, a 7% increase that costs about two jobs a month (3%) adds about $16,100 a year in margin.
The number and where it comes from
The break-even formula comes straight from the arithmetic of margin, and pricing textbooks such as The Strategy and Tactics of Pricing (Routledge) teach it as the first test of any price change. Before the increase, each sale earns its margin; after it, each sale earns the margin plus the full amount of the increase, so fewer sales can produce the same total. Written with both figures as percentages of the old price, the share of sales that can be lost is price increase ÷ (margin + price increase).
Margin here means the price minus the costs that come with each sale, such as materials, product, supplies or a technician's paid hours, and not rent, insurance or software, which stay the same whether the business does 58 jobs or 60. The owner's instinct usually runs the other way: If even a few customers leave, the increase wasn't worth it. The formula replaces that worry with a number the owner can watch.
A McKinsey analysis of the average income statement of S&P 1500 companies shows why the lever is so strong, since a 1% price increase with steady volume raised operating profit by about 8%, more than three times the effect of a 1% gain in volume.
The worked calculation
| Average job price (Assumption) | $400 |
|---|---|
| Materials and technician hours per job (Assumption) | $240 |
| Margin per job (Calculated) | 40% ($160) |
| Jobs per month (Assumption) | 60 |
| Price increase (Assumption; Calculated) | 7% (new price $428) |
| Break-even loss (Calculated (7% ÷ 47%)) | 14.9% (about 9 jobs a month) |
| Monthly margin before (Calculated (60 × $160)) | $9,600 |
| Monthly margin if 3% of jobs are lost (Calculated (58.2 × $188)) | $10,942 |
| Extra margin per year (Calculated (($10,941.60 − $9,600) × 12)) | $16,099 |
Illustrative example; replace every assumption with your own numbers. If staff earn a percentage commission, subtract their share of the increase from the new margin before you compare.
The widget on the site: two sliders, one for the price increase (1% to 20%) and one for the margin on each sale (20% to 80%), with one result in plain words: "You could lose up to X of every 100 customers and still earn the same." A small note under the result links to the full pricing guide.
How you compare
- Who stays: in experiments published in the Journal of the Academy of Marketing Science, satisfied customers' intention to return fell much less as a price increase grew than dissatisfied customers' did, so a business with strong rebooking can expect to lose fewer than the break-even share.
- What customers accept: in a classic American Economic Review survey, 79% of respondents judged it acceptable for a business to pass a higher cost on to customers.
- Your own baseline: count jobs or visits for the 60 days before the increase and the 60 days after, then compare the actual loss with your break-even share.
Start by working out the margin on your most common job or service, then run the formula for a 5%, 7% and 10% increase and write the three break-even shares beside your current monthly volume.
Sources
- Nagle, T. T. and Müller, G. The Strategy and Tactics of Pricing, 6th edition. Routledge, 2018.
- Marn, M. V., Roegner, E. V. and Zawada, C. C. The Power of Pricing. McKinsey Quarterly, 2003. Average income statement of S&P 1500 companies.
- Homburg, C., Hoyer, W. D. and Koschate, N. Customers' Reactions to Price Increases: Do Customer Satisfaction and Perceived Motive Fairness Matter? Journal of the Academy of Marketing Science 33(1), 2005. Three experiments, 80 to 174 participants each.
- Kahneman, D., Knetsch, J. L. and Thaler, R. Fairness as a Constraint on Profit Seeking: Entitlements in the Market. American Economic Review 76(4), 1986. 101 respondents for the question cited.
Related reading: How to Raise Prices Without Losing Customers, Based on the Research · How and When Salons Should Raise Their Prices · The Price Increase Announcement to Send Your Customers
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