Are You Undercharging? How Gross Profit Funds Marketing and Business Growth

Your business is busy. Customers are buying. Revenue is coming in.

Yet when it is time to improve your website, launch an advertising campaign, or invest in consistent marketing, the money never seems to be available.

That can be a pricing problem.

If your prices leave too little after delivering your products or services, your business may struggle to cover overhead, attract new customers, and retain a reasonable profit—even when sales look healthy.

In his video, “Why Small Business Owners Always Undercharge,” Alex Hormozi emphasizes the importance of understanding gross margins. The practical lesson for business owners is that pricing determines how much each sale leaves to support the rest of the company.

Healthy gross profit helps a business cover operating expenses, invest in customer acquisition, and generate net profit. Sustainable growth requires all three.

Gross Profit vs. Net Profit: What Is the Difference?

Revenue tells you how much your business sells. It does not tell you how much the business keeps.

Gross profit is sales revenue minus the cost of goods sold, or the corresponding cost of delivering services.

Those costs may include merchandise, materials, delivery labor, subcontractors, and applicable production overhead. The appropriate classification depends on your business and accounting methods.

Gross profit margin expresses gross profit as a percentage of revenue:

Gross profit margin = Gross profit ÷ Revenue × 100

Net profit is what remains after all applicable expenses, including operating costs, interest, and business income taxes, with adjustments for other income or expenses. Understanding profit and loss statements

For example, a $1,000 sale with $600 in delivery costs produces:

• $400 in gross profit
• A 40% gross profit margin

That $400 still needs to help support the rest of the business. It is not automatically available for the owner to withdraw.
Administrative work, office expenses, marketing, and other costs still need to be paid.

Why Small Businesses Undercharge

Underpricing often begins with understandable intentions.

An owner wants to win the job, help a customer, or avoid losing business to a competitor. Sometimes, the owner underestimates the value of work that now feels easy because of years of experience.

But customers benefit from more than the minutes spent completing a task. They may be paying for expertise, reliability, convenience, fewer mistakes, or a problem solved correctly.

Another common problem is incomplete costing.

A service appears profitable until you include preparation, travel, revisions, supervision, and follow-up. A product looks attractive until fulfillment, damaged inventory, or returns enter the picture.

Pricing decisions should consider costs, customer value, and market conditions together. Guidance on choosing a pricing strategy

Your competitors’ prices can provide context. They cannot tell you what it costs to operate your company.

How Better Pricing Can Change Profitability

Consider a hypothetical service business completing 50 comparable jobs per month.

Each job costs $600 to deliver. Monthly operating expenses other than marketing total $12,000, and marketing costs $4,000.

In this illustration, a 20% price increase produces $10,000 more gross profit. With the other expenses unchanged, operating profit also rises by $10,000.

Net profit would then reflect applicable interest, taxes, and other nonoperating items.

This example assumes customers accept the new price, sales volume stays constant, and costs do not increase. Real pricing changes can affect all three. Use the calculation to test scenarios, not predict a guaranteed result.

The important relationship is clear: an improvement in gross profit can have a substantial effect on what remains after overhead.

Discounts Can Reduce Profit Faster Than You Expect

Return to the $1,000 job with $600 in delivery costs.

A 10% discount reduces the price to $900. If delivery costs stay the same, gross profit falls from $400 to $300.

That is a 25% reduction in gross profit dollars from a 10% price discount.

To generate the same total gross profit, the business would need roughly one-third more jobs—assuming it can handle the additional volume without increasing other costs.

Discounts can still serve a purpose. But owners should understand what they are giving up and what they expect to gain.

Before approving a promotion, ask:

• Will it attract customers who are likely to return?
• Does it fill capacity that would otherwise go unused?
• Will the additional work require overtime or extra support?
• How much gross profit remains after the offer?

A promotion that increases sales while exhausting capacity and reducing earnings may be a poor trade.

What Gross Profit Margin Should Your Business Target?

There is no single healthy gross margin for every business.

In the supplied video, Hormozi describes an 80% gross margin as a preference for certain service businesses. That is not a universal requirement for contractors, manufacturers, retailers, transportation companies, or other business models.

Your target needs to reflect:

• Delivery costs and how they are classified.
• Overhead and staffing requirements.
• Customer acquisition costs.
• Expected sales volume and capacity.
• Customer retention and repeat purchases.
• The operating profit your business needs.

For a simplified planning example, suppose a business expects $100,000 in monthly revenue. It needs $25,000 for operating expenses other than marketing, $10,000 for marketing, and $15,000 in operating profit.

It would need $50,000 in gross profit—a 50% gross margin—to support that plan.

That calculation is a starting point. It does not establish whether customers will accept the required prices or whether the projected revenue is achievable.

Review the assumptions with your accountant and compare businesses that classify costs consistently.

Margin and Markup Are Different

A 50% markup does not produce a 50% gross margin.

If something costs $100 and you add a 50% markup, the selling price is $150. Gross profit is $50, or approximately 33.3% of the selling price.

To calculate a price from a target gross margin:

Price = Cost of sale ÷ (1 − Target gross margin)

At a $100 cost and a 50% target gross margin, the calculated price is $200.

The formula establishes a financial requirement. Your offer still needs to justify that price to customers.

Why Gross Profit Matters to Your Marketing Budget

Marketing needs resources before its results are fully known.

Your business may need to create content, improve a landing page, test advertising, and follow up with prospects before new revenue arrives.

When every sale leaves too little gross profit, marketing becomes vulnerable. The business starts a campaign, stops it when cash gets tight, and restarts when sales slow down.

A stronger financial foundation gives you more room to maintain a planned marketing effort and evaluate it over an appropriate period.

However, additional margin does not justify unlimited spending. Marketing must still attract suitable customers at an economically sustainable cost.

Evaluate What a New Customer Leaves Behind

Suppose a first sale produces $400 in gross profit. If acquiring that customer costs $250, only $150 remains before any additional costs not already counted and the customer’s share of general overhead.

Now suppose the same acquisition cost brings in a sale producing $600 in gross profit. The remaining amount is $350.

The marketing campaign did not become cheaper. The economics of the sale improved.

For acquisition decisions, also examine contribution margin: revenue minus all variable costs. It differs from gross margin because accounting cost-of-sales categories do not always include every variable expense. The SBA uses contribution margin in its break-even guidance. SBA business-planning guidance:
Fixed Costs ÷ (Price – Variable Costs) = Break-Even Point in Units

The Benefits of a break-even analysis:

• Price smarter – Pricing psychology goes into pricing, but knowing how it will affect your profitability is just as important.
• Catch missing expenses – Completing the break-even analysis includes all your financial commitment, limiting surprises in the future.
• Set revenue targets – By completing the analysis, you’ll know exactly how much you need to sell in order to be profitable.
• Make smarter decisions – Limit business decisions made on emotions.
• Limit financial strain – A realistic analysis of potential outcomes mitigates risk by showing when to avoid a business idea.
• Fund your business – A break-even analysis is normally a requirement when taking on debt or investors to fund your business.

Include sales commissions, transaction costs, fulfillment, and other relevant expenses without counting them twice.

Repeat purchases can improve the economics, but use observed retention and purchasing behavior—not an optimistic lifetime-value estimate—to support spending decisions.

Profit Does Not Automatically Mean Cash Is Available

A profitable sale may not produce immediate cash.

Customers may pay later, while payroll, materials, and advertising bills are due sooner. Inventory purchases, loan principal payments, and equipment purchases can also affect cash differently from reported profit.

Before increasing marketing spending, review:

• When customers actually pay.
• When delivery and acquisition costs must be paid.
• Cash needed for existing commitments.
• The time it takes to recover acquisition spending.

For suitable businesses, deposits, milestone billing, or clearer collection processes may help align cash receipts with delivery obligations.

The objective is a growth pace your business can finance while continuing to serve customers well.

How Marketing Can Support Healthier Pricing

Effective marketing helps customers understand why your offer deserves consideration.

If your website and sales materials make your business look interchangeable with every alternative, price becomes an easy comparison.

You can make the value clearer by explaining:

• The customer problem you solve.
• What your service includes.
• The expertise and process behind the work.
• Evidence from relevant projects or customer experiences.
• The support customers receive before and after purchase.

For example, a contractor can explain project supervision, site protection, communication, and cleanup. A bookkeeping firm can clarify reporting, review processes, and the decisions its work helps clients make.

These details must reflect the actual service. Marketing can communicate value; operations must deliver it.

Better targeting also matters. The lowest-cost lead is not necessarily the customer whose needs, budget, and expectations fit your business.

Five Steps Toward More Sustainable Growth

1. Review Profitability by Offering

Look beyond your overall revenue. Identify which services, products, or customer groups generate adequate gross profit and which consume disproportionate resources.

2. Account for the Work Required

Check delivery labor, materials, subcontractors, revisions, and other relevant costs. If the owner performs delivery work without a salary, consider its replacement cost in management planning, even if the accounting treatment differs.

3. Model Pricing and Scope Changes

Test the effects of different prices, sales volumes, and costs. Consider clearer packages, tighter scope, better processes, or a different service mix alongside price increases.

4. Connect Marketing to Customer Economics

Establish what the business can reasonably spend to acquire a customer while supporting delivery, overhead, and profit. Track qualified inquiries and actual customers, not just traffic.

5. Review Results Together

Bring pricing, sales, marketing, and operations into the same discussion. A higher close rate means little if the business is consistently selling work at an unsustainable price.