The short answer. Raise prices in three scenarios. First, when restated MMP no longer clears at current pricing (rate changes, new debt, restated owner comp, or working capital growth all trigger this). Second, when Realized Gross Margin has slipped more than 4 points below Intended (the cascade is compounding). Third, when a material input cost has moved by more than 5 percent (supplier price, labor rate, or freight). Any one of the three is a diagnostic reason to price up. Emotion is not.
Scenario 1: MMP Restatement
Every material change in the cost structure of the business restates MMP. New debt. Rate move on variable debt. New hire that adds Fixed Cost. Restated owner comp to market. Working capital growth from expansion.
When restated MMP no longer clears at current pricing, the pricing model has to move to fund the restated floor. Not always by a lot. But by enough to restore the coverage.
In a typical case: new SBA loan of $200,000 at prime plus 2 over 7 years produces roughly $32,000 in annual principal debt service. Grossed up for taxes at 1.30, that is $41,600 in required annual pre-tax profit. At a 35 percent gross margin, that is about $119,000 in required incremental gross margin dollars, which at a $2 million revenue business is about a 3-point price increase on the recurring book. Small but real.
Scenario 2: Cascade Widening
The gap between Intended Gross Margin and Realized Gross Margin can be closed two ways. Fix the operational cause of the gap (labor productivity, material waste, delivery efficiency). Or reprice to make the delivered margin match the intended margin.
If the operational fix is inside management control, do that first. Cheaper than repricing.
If the cascade is structural (labor market rates rose, supplier prices moved, delivery got harder), the operational fix is not available and repricing is the answer. A 6-point cascade in a $3 million business is $180,000 in lost margin. Closing it usually requires a 5 to 8 point price move on the book, phased across the renewal cycle.
Scenario 3: Input Cost Movement
A supplier raises 8 percent. That is a real change in the cost structure. The pricing model needs to reflect it.
The reactive response is to absorb the increase. That works exactly once, temporarily, until Working Capital erodes and the shortfall becomes visible.
The diagnostic response is to model the new cost through Layer Cake. Layer 3 Required Gross Margin Dollars rises to hold Layer 4 Intended Gross Margin. Layer 5 Breakeven rises. Prices adjust to restore the margin dollar target.
This is exactly the tariff situation covered in The Tariff Read. Businesses that absorbed the input cost hit Working Capital ceilings within two quarters. Businesses that repriced through Layer Cake held.
Frequently Asked Questions
How much should I raise?
The number the diagnostic produces. Not more, not less. Model through Layer Cake. If restated MMP requires 4 points, raise 4 points. Do not add margin cushion on top for emotional reasons. Emotional cushions get discovered by customers and become negotiation targets.
How should I communicate a price increase?
Directly, professionally, without apology. Cite the specific cost driver (labor, materials, insurance, whatever is relevant). Give reasonable notice for renewal book. Do not send apology emails that read like the business is embarrassed by its own math. The math is defensible.
What if a big customer threatens to leave?
Model the customer standalone. If they are contributing above Intended Gross Margin, negotiate the increase down slightly to keep them. If they are contributing below Intended, let them leave. Losing a below-margin customer is a portfolio improvement, not a loss.
How often should I raise prices?
At least annually on recurring work in a normal environment. More often in periods of input cost volatility. Businesses that never raise prices are underpricing every year they defer.