- Many SMEs are facing a profit margin squeeze as costs rise and customers push back on price increases.
- Owners must know their real margins by segmenting revenue and identifying which products, services, and customers are truly profitable.
- Weak pricing needs to be fixed with structured increases, clear discount rules, and smarter packaging of offers.
- Cost reductions should target process inefficiencies, rework, and supplier terms rather than blindly cutting essential activities like marketing.
If you feel like you’re working harder than ever and keeping less of what you earn, you’re not alone. Many small and medium-sized enterprises (SMEs) are facing a classic challenge: profit margin squeeze.
This is your bi-weekly SME Entrepreneur Newsletter with more in-depth analysis.
Costs are rising. Customers are more price sensitive. Larger competitors are discounting to win market share. At the same time, your team, your suppliers, and even your bank expect you to “make the numbers work.”
You can’t simply “sell more” and hope it fixes itself. When margins are under pressure, you need a deliberate strategy. Here’s how to think about it as a disciplined owner rather than a stressed operator.
Know Your Real Margins, Not Just Your Revenue
Most SMEs track sales closely but only glance at margins. That’s dangerous in a squeeze.
You need to understand:
- Gross margin: Revenue minus direct costs of delivering your product or service
- Contribution margin: What’s left after variable costs, before fixed overhead
- Net margin: What’s left for you after everything
Strategize:
1. Segmenting your revenue into key product lines, services, or customer types.
2. Assigning direct costs to each segment: materials, subcontractors, direct labour, transaction fees, shipping, etc.
3. Ranking segments from highest margin to lowest.
You will almost always find this surprise: not all revenue is equal. Some products, service lines, or customer segments look “big” but quietly destroy your profitability.
Your first job is not to grow everything. It’s to understand what’s really worth growing.
Ruthlessly Fix “Leaky Bucket” Pricing
When margins are tight, weak pricing becomes fatal.
Ask yourself:
- When was the last time you reviewed your prices against today’s costs, not last year’s?
- Do you offer “legacy” pricing to old customers that is no longer sustainable?
- Are you discounting reactively just to close deals?
Strategize:
1. Introduce structured price increases
- Start with existing customers on older rates.
- Communicate clearly: increased input costs, improved service, or added value.
- Give notice and options (e.g. “stay on current plan with reduced scope” or “move to new plan at updated rate”).
2. Stop unplanned discounts
- Set clear guardrails: who can discount, by how much, and for what reasons.
- Offer value-added bonuses (faster delivery, small add-ons) instead of cutting prices.
Pricing is rarely just a math problem. It’s a confidence problem. Your customers feel it when you’re unsure. Get clear on your value and charge accordingly.
Attack Cost Drivers, Not Just Line Items
When margins are under pressure, many SMEs cut the easiest expenses first: marketing, training, or small tools. That usually hurts growth more than it helps profit.
Instead, focus on cost drivers:
- Process inefficiency: How many steps, approvals, and handoffs are involved in delivering one unit of value?
- Rework and errors: How often do you redo work, correct mistakes, or handle complaints?
- Supplier terms: Are you getting the best pricing and payment terms for your volume?
Strategize:
- Map your core processes (from order to cash, from lead to sale) and ask:
“Where do we waste time, repeat work, or wait on someone else?”
- Standardize repetitive work with checklists, templates, and simple SOPs.
- Negotiate with suppliers for volume discounts, longer payment terms, or alternative materials that meet your quality standards.
The goal is simple: deliver the same or better value using fewer hours, fewer materials, and fewer surprises.
Fire Unprofitable Work and Customers
Not every customer is worth keeping in a margin squeeze.
Look at:
- Accounts that demand constant customisation but resist fair price increases
- Clients who pay late, argue about scope, or drain your team’s energy
- Low-margin products or services that create a lot of admin for very little return
Strategize:
- Can we reprice or rescope this relationship so that it becomes healthy?
- If not, is it time to gracefully exit?
Double Down on High-Margin Value
Once you’ve cleaned up the leaks, direct your energy where it counts.
- Identify the top 20% of products or services that generate the highest margins.
- Identify the top 20% of customers who are easiest to serve and pay reliably.
Strategize:
- How can we sell more to these customers?
- What complementary offer could we add to that that uses our existing strengths and systems?
- Where can we provide more value without a proportional increase in cost?
Profit margin squeeze is a real threat, but it’s also a wake-up call. It forces SMEs to stop chasing “busy” and start building disciplined, profitable businesses.
See you next week for another edition of your SME Entrepreneur newsletter.
“May you always have the mindset of an entrepreneur”
Sajjad Hamid is an SME & Family Business Adviser who supports entrepreneurs in scaling their ventures. In his spare time in Trinidad and Tobago, he cultivates organic tropical fruits and vegetables, practising sustainable farming in his home garden.
He is the author of Build Your Legacy Business: Solopreneur To Family Business Hero. Sajjad is a Fellow of the Family Firm Institute. You can contact him at [email protected] or visit www.entrepreneurtnt.com.
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