How to Improve Product Margins: 3 Approaches Every SME Owner Should Know
Shrinking margins are one of the most stressful things an SME owner can face, and the instinct to either cut costs aggressively or raise prices immediately does not always produce the result you are hoping for. This post covers three practical approaches to improving product margins, with an honest look at what each one involves and where the real opportunities tend to hide.
The Problem: Your Revenue Looks Fine but the Money Is Not There
This is one of the most disorienting experiences in business. You are busy. Sales are coming in. The team is working hard. And yet when you look at the bank account or sit down with your accountant, the profit is nowhere near what the revenue should be producing.
Margin erosion in SMEs tends to happen gradually and quietly. A supplier puts prices up and you absorb the increase rather than pass it on. Your service delivery takes longer than it used to because your team has grown and coordination has slowed. You discount to win a client and then forget to reprice when the relationship is established. Costs creep upward while prices stay flat. None of these things feels catastrophic in isolation, but together they quietly hollow out the profitability of a business that looks healthy on the surface.
Improving product margins is not always about dramatic restructuring or uncomfortable confrontations with clients. Often the biggest opportunities are sitting in plain sight, hiding inside pricing decisions made years ago, delivery processes nobody has questioned recently, and cost structures that have never been properly mapped.
The three approaches below cover the territory where SME margin improvement opportunities are most commonly found.
Approach 1: Pricing Architecture Review
For many SME owners, pricing was set at the beginning of the business based on what the market seemed to bear, what competitors were charging, or simply what felt like enough to get the work. It then gets updated occasionally and inconsistently, often only when a client pushes back or a cost increase becomes impossible to ignore.
The result is a pricing structure that reflects the past rather than the present, that varies inconsistently across clients and products, and that leaves significant margin on the table in places the owner has stopped looking.
A pricing architecture review means sitting down with all of your products or service lines and asking honestly: does this price reflect the value we deliver, the cost of delivering it, and the market we are operating in today? Not three years ago. Today.
This process almost always surfaces at least one of three things: products or services that are underpriced relative to their value, clients on legacy pricing that has never been updated, or a discount pattern that has become habitual rather than strategic.
Pros: Often the fastest route to margin improvement because it does not require operational change, just pricing discipline. Even a modest price increase across a well-established client base can produce a meaningful improvement in overall margin.
Cons: Requires confidence in having the pricing conversation with clients, and some client relationships will push back. Poorly managed price increases can also damage relationships if not communicated with care and context.
Best suited to: SMEs that have not formally reviewed their pricing in the past twelve to eighteen months, businesses with a mix of older and newer clients on different rates, and any business where discounting has become the default response to competitive pressure.
Approach 2: Cost of Delivery Analysis
The second approach shifts focus from what you charge to what it actually costs you to deliver. In many SMEs, the true cost of delivering a product or service has never been fully mapped. Labour time is often underestimated. Overhead allocation is inconsistent. The cost of rework, client management, and delivery variation is rarely factored in systematically.
A cost of delivery analysis means tracing the real cost of producing and delivering each of your key products or services, from the first hour of work through to delivery and any post-delivery support. This includes direct costs (materials, labour, contractor fees), indirect costs (management time, systems, overhead), and the cost of any variation from the standard process (rework, scope creep, client-driven changes that are not charged for).
What most SME owners find when they do this properly for the first time is that some products or services they assumed were profitable are actually margin-neutral or worse, and that specific clients or project types are consistently more expensive to serve than others.
Pros: Gives you a clear, evidence-based picture of where your margin is actually being made and lost. Creates a strong foundation for pricing decisions because you know your real cost floor. Often reveals operational improvement opportunities that reduce delivery cost without any pricing change.
Cons: Takes time to do properly, particularly if your financial systems do not currently track costs at the product or service level. Requires honest engagement with your delivery processes, including the uncomfortable parts.
Best suited to: SMEs with multiple product or service lines, businesses where delivery time or complexity varies significantly across clients or projects, and any owner who suspects their margin is leaking but cannot pinpoint where.
Approach 3: Portfolio Rationalisation
The third approach is the one most owners are reluctant to consider, which is usually a sign it is worth thinking about seriously. Portfolio rationalisation means deliberately narrowing your range of products or services to focus on the ones that generate the best margin, fit your team's capabilities most naturally, and position the business most clearly in the market.
Most SMEs accumulate products and services over time in response to client requests, competitive pressure, or opportunistic expansion. The result is often a portfolio that is broader than the business can deliver efficiently, that requires a wider range of skills and systems than is ideal, and that dilutes focus in ways that affect quality and margin across the board.
Rationalising the portfolio does not mean making it smaller for the sake of it. It means being deliberate about what you offer, to whom, and why. The businesses that do this well tend to find that delivering fewer things more consistently and at a higher quality level produces better margins, stronger client relationships, and a clearer market position than trying to be everything to everyone.
Pros: Can produce significant margin improvement by eliminating low-margin work that consumes disproportionate operational capacity. Also simplifies operations, improves quality consistency, and often strengthens the business's market positioning.
Cons: Requires difficult decisions about which products or services to exit, and potentially which clients to transition away from. Can feel counterintuitive when revenue from low-margin work still feels like revenue worth keeping.
Best suited to: SMEs with a broad and somewhat unfocused product or service range, businesses where delivery quality is inconsistent across different offerings, and owners who are ready to trade breadth for depth and margin.
Where to Start
If you are not sure which approach is right for your business, start with the cost of delivery analysis. Understanding your real cost structure is the foundation everything else builds on. You cannot make good pricing decisions without it, and you cannot make good portfolio decisions without it either.
Once you know where your margin is actually coming from and where it is leaking, the pricing and portfolio decisions become considerably clearer. You will likely find that all three approaches have something to offer your business. The order in which you pursue them matters less than making a start.
