The short answer. Run the math before you do either. Cut costs when the gap is operational and inside your control: labor productivity, waste, rework. Raise prices when the gap is structural: input costs, debt service, owner pay at market. At a 35 percent gross margin, a 3 percent price increase can lose almost 8 percent of volume and still hold the same gross margin dollars.
Why Owners Cut First
Cutting feels like control. You decide, you sign, it happens. Raising prices feels like risk. The customer decides, and the owner imagines every one of them leaving.
So the owner cuts. The marketing goes. The training goes. Then a technician goes. Six months later the business has lower costs, lower capacity, lower revenue, and the same shortfall it started with.
The Price Math Owners Never Run
Take a $2 million business at 35 percent gross margin. That is $700,000 in gross margin dollars.
Raise prices 3 percent with no volume loss. Revenue becomes $2.06 million. Cost does not change, so the whole $60,000 lands in gross margin. To find the same $60,000 through cuts, you would have to remove $60,000 of cost without losing any capacity or quality.
Now the part that matters. After the increase, every dollar of old volume earns 38 cents of gross margin instead of 35. You could lose almost 8 percent of your volume and still hold the same $700,000 in gross margin dollars. Most owners fear losing customers over 3 percent. Almost none would lose 8 percent of volume over it.
When Cutting Is the Right Answer
Cut when the gap is operational and the fix is inside your walls. A cascade between Intended and Realized Gross Margin caused by rework, waste, or unbilled hours is a cost problem. Labor productivity utilization well below 80 percent is a cost problem. Repricing does not fix those. It just charges the customer for your inefficiency, and good customers notice.
Fix operational leaks before you reprice. It is cheaper, it is faster, and it protects the relationships you will need when a structural price increase is required.
When Raising Prices Is the Right Answer
Raise when the gap is structural. Material and labor costs moved. Debt service went up. Owner compensation was restated to market rate. Minimum Mandatory Profit was restated and current pricing no longer clears it. No amount of trimming fixes a price that was built for a cost structure that no longer exists.
See When Should I Raise Prices? for the three triggers and how to size the increase.
What Never to Cut
- Capacity you are about to need. Cutting the technician who would have delivered next quarter's backlog is a revenue cut, not a cost cut.
- The people who protect margin. Estimators, project managers, and quality control keep the cascade small.
- Collection effort. Cutting the person who chases receivables lengthens the cycle and raises Working Capital Required.
Frequently Asked Questions
Can I do both?
Yes, and often you should. Close operational leaks first, then reprice for structural changes. The order matters: fixing the leaks first keeps the price increase smaller and easier to defend.
How do I know if my gap is operational or structural?
Compare quoted margin to delivered margin. If the quote is right and delivery falls short, it is operational. If the quote itself no longer clears your floor, it is structural.
What if my competitors are cutting prices?
Then they are either more efficient than you or they are about to find out what their floor is. Know your own number. Do not price off a competitor who has not computed theirs.
How much volume will I actually lose?
Usually much less than owners fear. Run the break-even volume math above for your own margin. Then model your lowest-margin customers first, because they are the ones most likely to leave, and the ones you can most afford to lose.