It can feel very seductive, especially for professional service firms. I can make $10 or so per hour on this person, so why not go for it. This can be especially true for firms that place people on projects on an interim basis.

That’s what I call incremental pricing, making a small amount on a particular job. After all, the incremental amount will be gravy, additional income coming into the bottom line.

The major problem with incremental pricing is that it can be leaving serious money on the table. Rather than saying what you could pick up in small amounts on additional work, what if instead you could raise your margin slightly on a lot of your existing business. And besides, you could also pick up some incremental business at the higher price point. Pulling that off could be much more valuable than the benefits from some incremental small work.

Another problem with incremental pricing is that it can become too successful without adding much to the bottom line. You could suddenly find yourself attracting a lot of the incremental pricing type of work, so suddenly now the headcount in that line dwarfs the headcount from your regular margin business.

Another challenge with the incremental pricing is that it also could set you up for lower margins on future business. The client has now known what to expect. It can be challenging to raise prices going forward.

We think a better view is to look at margins and what can you do to increase business at the current margins you have or how can you raise the current margins that you have.

Another challenge with the incremental pricing is that there can be a number of hidden costs that aren’t really taken into account. For example:

1. Insurance costs.

2. Overhead costs.

3. Risk of failure if the person in the field does not meet standards and having to provide additional services to the customer to make up for it.

The bottom line when you’re tempted to pick up some additional business at very low margins look at it very closely, is it really the strategy that you want to pursue? Think hard about what other options there might be that could help you generate additional margins in other ways that could be much more fruitful.