A founder had been cutting costs for two years. Renegotiated suppliers, frozen headcount, trimmed software licences. Net margins had barely shifted. When we sat down and pulled the gross margin figures by client, it turned out her three most profitable accounts were paying prices set four years earlier. The gap was on the pricing page, not the cost line.
That mismatch is not unusual in owner-managed businesses. The question is which lever you should actually be reaching for.
Which lever are you actually reaching for?
The two broad levers for margin improvement are the revenue side (raising prices, shifting your sales mix towards higher-margin work, upselling existing clients) and the cost side (renegotiating suppliers, improving operational efficiency, reducing overhead). Both can improve margins without losing customers, but they work in different situations. Reaching for the wrong one wastes time and can create problems the right lever would have avoided.
The choice is rarely obvious from the outside. A business with gross margins already below its sector benchmark needs to address cost and procurement before touching pricing. A business with loyal, embedded clients paying outdated prices has pricing headroom it has not tested. A business with a mixed portfolio of services likely has profitable work sitting alongside commodity-priced work that is dragging the average down.
The mistake founders often make is choosing the lever they prefer rather than the one likely to yield the return. Cost reduction feels controllable and immediate; price changes feel risky. But Nicholsons Chartered Accountants, who advise owner-managed businesses on profit improvement, note that resilient margins typically come from balancing all three core levers together: revenue growth, margin improvement, and overhead reduction. Relying on just one rarely closes the gap.
Start with data. Pull your gross margin by product, service line, and client. Look at which segments are delivering and which are dragging the average down. The answer to “which lever” is usually visible in that analysis.
When should you work on the revenue side first?
Revenue-side moves make sense when your prices are below market, your best clients show no signs of price sensitivity, or your portfolio includes low-margin work you are doing too much of. Hiscox’s guidance for owner-managed businesses suggests targeted price rises of 3 to 5 per cent on popular or convenience-driven lines typically see minimal volume loss when paired with a clear explanation of the value being delivered.
The clearest signal that you have pricing headroom is a combination of low client churn, high repeat business, and prices that have not moved in two or more years. Loyal clients who are embedded in your service are usually less price-sensitive than founders fear. Xero’s guidance on profit improvement notes that pairing a price change with a tangible service improvement (faster turnaround, a more structured support arrangement, extended reporting) significantly reduces the churn risk.
Mix optimisation is often the less visible but more powerful version of this lever. If sales effort has been directed towards popular rather than profitable work, shifting towards higher-margin services such as fixed-fee plans, retainers, or bundled packages can lift the average margin per client without touching headline prices. Introducing minimum engagement sizes, framed clearly as maintaining service quality, is another customer-tolerated move that many founders find draws far less pushback than they expect.
Both approaches benefit from the same underlying data: gross margin broken down by service and client.
When does cutting costs make more sense?
When your gross margin is already below sector benchmarks, when input costs have risen faster than your selling prices, or when there is visible waste in how your team works, the cost side is usually the right place to start. Proxima Group, which works with businesses on procurement and cost improvement, finds that analysing spend by supplier often reveals savings of 5 to 15 per cent with no quality loss.
The most straightforward cost move is supplier renegotiation. Many owner-managed businesses have supplier contracts that have not been formally reviewed for years. Consolidating spend with fewer suppliers, rebidding contracts, and benchmarking against market rates are all standard approaches. CIPS, the professional body for procurement and supply, notes that buyers who actively benchmark and renegotiate on a regular cycle consistently achieve better terms than those who wait for suppliers to raise prices before reacting.
Beyond procurement, operational efficiency is where the invisible gains tend to sit. The UK Government’s Help to Grow: Digital evaluation found that owner-managed businesses adopting digital tools for scheduling, invoicing, and workflow management saw productivity improvements of 7 to 18 per cent in some functions. Customers frequently welcome these changes because better systems typically mean faster turnaround and fewer errors.
ONS annual business survey data shows that net profit margins vary significantly by sector. A professional services business running at 25 to 30 per cent net margin faces different pressure than a hospitality business at 5 per cent. Know where you sit before deciding how much the cost lever needs to move.
What does it cost to get this wrong?
The risks on both sides are real. On the revenue side, a poorly timed or poorly communicated price rise can trigger churn among price-sensitive clients at a moment when you cannot afford to lose volume. On the cost side, cutting too deep or choosing suppliers purely on price can damage service quality in ways that take months to appear in the numbers but are immediate in the client relationship.
There is also a regulatory dimension that UK founders need to understand. The Competition and Markets Authority has made clear that hidden fees, complex add-on charges (drip pricing), and misleading discount framing can breach UK consumer law. Its 2023 review found drip pricing widespread across sectors and called for clearer upfront disclosure of the total price. Earlier enforcement action against online hotel booking platforms in 2019 required changes to how discounts and rankings were presented, after customers were misled about genuine price reductions.
For businesses in regulated sectors, the FCA’s Consumer Duty, in force from 2023, requires that pricing genuinely reflects fair value for customers. The FCA’s 2021 general insurance reforms banned the practice of charging loyal customers more than new customers for equivalent cover, which illustrates how far the regulator is prepared to go when pricing practices are seen as unfair.
The highest-cost mistake is usually the one that damages trust directly: a hidden fee discovered by a long-standing client, a quality drop they attribute to cost cutting, a renewal price noticeably higher than what a new customer would pay. Replacing a client you have worked with for several years costs far more than any margin improvement you were chasing.
What to ask before you choose your move
Before pulling either lever, you need three pieces of information: your current gross margin broken down by product, service line, or client segment; where your prices sit relative to what comparable businesses charge for similar work; and where your time and overhead costs are concentrated relative to the value they produce. Without these three things, any margin move is a guess rather than a decision.
Ask yourself whether you have raised prices in the past two years. If not, you are very likely undercharging at least some clients relative to the value you are delivering and the cost increases you have absorbed since.
Ask yourself when your top ten supplier contracts were last renegotiated. If the answer is more than eighteen months ago, or you are not sure, that is your cost lever question.
Ask yourself which parts of your operation consume the most staff time for the least client-facing output. Manual admin processes, rework cycles, duplicated data entry: these are the targets for efficiency improvement that customers will not notice or will actively welcome.
The goal is a portfolio approach: modest, well-explained pricing changes where you have headroom; deliberate mix management to grow the share of revenue from higher-margin work; and disciplined cost review to remove friction without cutting service quality. Trying to close a margin gap by pulling one lever hard usually means the margin comes back in a different form of damage.
A structured conversation with an accountant who understands your sector’s margin norms, combined with a clear look at your own data, will do more than any generic strategy framework. If you want to think through which lever fits your specific situation, a conversation is a sensible place to start.
