Pricing Strategy for Growing Businesses: Capture More Value
Pricing is the fastest lever to improve profitability—yet most business owners set prices once and rarely revisit them. Here's how to build pricing power and capture the value you create.
Key Takeaways
- •A 1% improvement in price yields 8-11% improvement in operating profit—more than any other lever
- •Value-based pricing captures significantly more profit than cost-plus pricing for differentiated offerings
- •Most businesses undercharge by 15-30% because they price based on costs or competitors rather than customer value
- •Price increases rarely cause the customer loss that business owners fear—proper execution is key
- •Discounting trains customers to expect discounts and erodes profitability faster than most realize
Ask any CFO: "What's the fastest way to improve profitability?" The answer is almost always pricing. Yet pricing is the lever most business owners are afraid to pull.
This guide covers pricing strategy for growing businesses—companies doing $5M to $50M in revenue who have real pricing power but often don't realize it. We'll cover frameworks for setting prices, strategies for raising prices without losing customers, and the analytics you need to optimize pricing over time.
Why Pricing is the Highest-Leverage Profit Lever
The math on pricing is compelling. A study by McKinsey found that a 1% improvement in price— assuming volume stays constant—yields an 8-11% improvement in operating profit. No other lever comes close.
The Profit Impact of Pricing
For a company with $10M revenue, 60% gross margin, and 10% operating margin:
1% Price Increase: $100K additional revenue, most of which flows to profit
1% Volume Increase: $100K additional revenue, but only $60K gross profit (40% goes to COGS)
1% Cost Reduction: $60K savings (only affects the 60% that is COGS)
The price increase has the highest profit impact because it flows directly to the bottom line.
Why Business Owners Undercharge
Despite the compelling math, most growing companies leave significant money on the table. The reasons are more psychological than economic:
Fear-Based Reasons
- • Fear of losing customers to competitors
- • Fear of being seen as "greedy"
- • Fear of sales pushback
- • Fear that volume will collapse
- • Underestimating your own value
Process-Based Reasons
- • Set prices once and never revisited them
- • Used cost-plus instead of value-based
- • Matched competitor prices automatically
- • No formal pricing review process
- • Lack of customer value data
The Underpricing Test
If you haven't raised prices in 2+ years, if your close rate is above 60%, or if customers never push back on price, you're almost certainly underpriced. The absence of price complaints isn't a sign of good pricing—it's a sign of money left on the table.
Cost-Plus vs Value-Based Pricing
How you determine your prices matters as much as what those prices are. The two fundamental approaches yield dramatically different results.
Cost-Plus Pricing
Calculate your costs, add a markup percentage.
Formula: Price = Cost × (1 + Markup%)
- • Simple to calculate
- • Guarantees minimum margin
- • Ignores customer willingness to pay
- • Leaves money on the table
- • Appropriate for commodities
Value-Based Pricing
Price based on the value delivered to customers.
Formula: Price = Customer Value × Value Capture %
- • Captures more of the value created
- • Aligns incentives with customer success
- • Requires understanding customer outcomes
- • More complex to implement
- • Appropriate for differentiated offerings
Value-Based Pricing in Practice
Value-based pricing requires understanding the economic impact you have on your customers. This varies by business type:
| Business Type | Value Drivers | Value-Based Price Approach |
|---|---|---|
| Manufacturing | Quality, reliability, lead time, total cost of ownership | Price based on reduced scrap, downtime savings, inventory reduction |
| Professional Services | Expertise, outcomes, risk mitigation, time savings | Price based on project value, cost avoidance, revenue enabled |
| Distribution | Availability, speed, service, credit terms | Price based on stockout cost, working capital impact |
| Software/SaaS | Productivity gains, revenue growth, cost reduction | Price based on ROI, often 10-20% of quantified value |
Understanding Price Elasticity
Price elasticity measures how sensitive customers are to price changes. Understanding your elasticity helps you predict the impact of price changes and make better pricing decisions.
Price Elasticity Formula
Elasticity = % Change in Quantity / % Change in Price
Interpretation:
|E| < 1 = Inelastic (price increase raises revenue)
|E| = 1 = Unit elastic (revenue unchanged)
|E| > 1 = Elastic (price increase lowers revenue)
Factors That Reduce Price Sensitivity
The less price-sensitive your customers, the more pricing power you have. These factors reduce elasticity:
- Unique value: No close substitutes available; you solve a problem others can't
- Switching costs: Changing vendors is expensive, time-consuming, or risky
- Small share of budget: Your price is a small part of their total spend
- Quality perception: Customers believe higher price signals higher quality
- Relationship strength: Personal relationships and trust make price less important
- Urgency: Time pressure reduces price shopping behavior
- Business criticality: Essential products/services have lower elasticity
Testing Elasticity
You don't know your true price elasticity until you test it. Most businesses assume customers are more price-sensitive than they actually are. Consider testing higher prices with new customers before concluding you can't raise prices.
How to Raise Prices Without Losing Customers
The fear of raising prices is usually worse than the reality. Research consistently shows that well-executed price increases result in far less customer loss than business owners expect.
The Price Increase Playbook
1. Start with New Customers
Test higher prices with new customers first. They have no reference point for your "old" price. If close rates remain healthy, you've validated the new price without risking existing relationships.
2. Give Advance Notice
For existing customers, provide 60-90 days notice before price increases take effect. This shows respect and gives them time to budget. Surprise increases damage trust.
3. Lead with Value
Communicate the value you've delivered and any improvements you've made. The conversation should be "here's the value you've received, here's how we're continuing to invest, here's the new pricing"—not "sorry, we need to raise prices."
4. Be Confident, Not Apologetic
Over-explaining or apologizing signals that you don't believe in your value. State the new pricing matter-of-factly. Confidence is contagious—if you believe you're worth it, customers are more likely to agree.
5. Consider Grandfathering
For long-term customers, consider grandfathering old pricing for 6-12 months or offering a smaller increase. This rewards loyalty while still moving toward market pricing. Don't grandfather forever—that creates permanent pricing inconsistency.
6. Time It Right
Raise prices at natural transition points: contract renewals, new product launches, beginning of fiscal year. Avoid raising prices when customers are having a bad experience or during their busiest season.
Pricing Analytics: What to Track
Effective pricing requires ongoing measurement. You can't optimize what you don't measure. Here are the key metrics for pricing management:
| Metric | What It Tells You | Target |
|---|---|---|
| Average Selling Price (ASP) | Overall price level and trend over time | Should trend up or at least stay flat |
| Price Realization | Actual price vs. list price (shows discounting) | 90%+ for most businesses |
| Win Rate by Price Point | Whether you're pricing too high or low | 30-60% typical; too high may mean underpriced |
| Price-Related Churn | Customers lost specifically due to pricing | <5% of total churn |
| Gross Margin by Product/Service | Profitability across your portfolio | Varies by industry; identify low performers |
| Customer Lifetime Value | Total value of customer relationship | Should grow over time |
Price Variance Analysis
Segment your pricing data by salesperson, customer type, product, and time period. Large variance often indicates inconsistent pricing authority, excessive discounting by certain reps, or opportunities to raise prices in specific segments.
Service Business Pricing Models
Service businesses have unique pricing considerations. Time-based pricing is common but often leaves money on the table. Here are the main models:
Hourly/Time-Based Pricing
Charge for time spent. Simple to understand but penalizes efficiency and creates misaligned incentives (more hours = more revenue).
Best for: Unpredictable scope, early client relationships, exploratory work
Project/Fixed-Fee Pricing
Set price for defined scope. Rewards efficiency, provides budget certainty, but requires accurate scoping. Scope creep risk must be managed.
Best for: Well-defined deliverables, repeat project types, experienced providers
Value-Based/Outcome Pricing
Price based on results delivered. Captures more value when outcomes are significant, but requires measurable outcomes and client trust.
Best for: High-impact projects, measurable outcomes, strong track record
Retainer Pricing
Fixed monthly fee for ongoing access/services. Creates predictable revenue, deepens relationships, but must deliver ongoing value to prevent churn.
Best for: Ongoing advisory, maintenance, fractional executive roles
Moving Up the Value Ladder
The most profitable service businesses evolve their pricing over time:
Product Business Pricing Strategies
Product businesses—whether physical goods, software, or SaaS—have different pricing considerations than services. Here are key strategies:
Tiered Pricing (Good-Better-Best)
Offering multiple tiers captures value across customer segments. The key principles:
- Three tiers optimal: More creates decision paralysis; fewer leaves money on table
- Clear differentiation: Each tier should have obvious reasons to upgrade
- Anchor high: The top tier makes the middle tier look reasonable
- Recommend middle: Most customers should land on your target tier
Usage-Based Pricing
Charging based on consumption aligns price with value but requires careful implementation. Consider different SaaS pricing models and their tradeoffs.
Advantages
- • Low barrier to entry
- • Scales with customer value
- • Naturally expands with usage
- • Feels fair to customers
Challenges
- • Revenue unpredictability
- • Complex billing systems needed
- • Customer may limit usage
- • Harder for customers to budget
Enterprise Pricing
For larger customers, different rules apply. Learn more about enterprise pricing strategies.
- • Don't publish prices: "Contact sales" enables custom negotiations
- • Annual contracts: Enterprise buyers expect and prefer annual terms
- • Volume pricing: Offer discounts for commitment, not just for asking
- • Custom packages: Bundle features and services for specific needs
- • Value-based negotiation: Price based on their ROI, not your list price
The Hidden Cost of Discounting
Discounting feels like a harmless way to close deals, but the math is brutal and the behavioral effects are lasting.
The Math of Discounting
At a 40% gross margin, a 10% discount requires 33% more volume to maintain the same gross profit dollars:
Before discount: $100 sale × 40% margin = $40 gross profit
After 10% discount: $90 sale × 33% margin = $30 gross profit
Volume needed to break even: $40 / $30 = 133% of original volume
The Behavioral Cost
Beyond the immediate margin impact, discounting creates lasting problems:
- Trains customers to expect discounts: Once you discount, they'll always ask for discounts
- Attracts price-sensitive buyers: These customers are hardest to retain and least profitable
- Erodes brand positioning: Frequent discounting signals low value and desperation
- Creates internal inconsistency: Sales reps learn they can always discount to close
- Devalues to existing customers: Loyal customers feel penalized for not negotiating
When Discounting Makes Sense
Discounting isn't always wrong. Use discounts strategically for:
Strategic Discounts
- • Annual commitment (vs. monthly)
- • Volume commitments
- • Strategic/reference accounts
- • New market entry
- • Clearing old inventory
Avoid Discounting For
- • Closing deals that aren't closing
- • Matching competitor prices
- • Rewarding difficult negotiations
- • Meeting short-term quota
- • Customers who just "asked"
The Alternative to Discounting
Instead of reducing price, add value. Include additional services, extend warranty, provide training, or offer better terms. This maintains your price integrity while still giving the customer something.
In-Depth Guides
How to Raise Prices
Complete guide to price increases without losing customers
Value-Based Pricing
Pricing based on customer outcomes, not costs
SaaS Pricing Models
Per-seat, usage-based, tiered, and hybrid approaches
Enterprise Pricing
Strategies for large customer deals
Freemium vs Free Trial
When to give away value for free
Frequently Asked Questions
How do I know if my prices are too low?
Signs of underpricing include: very high close rates (above 60%), customers never negotiate or push back, competitors charge significantly more for similar offerings, you struggle to afford quality service delivery, and customers frequently mention what a 'great deal' you are. If nobody ever complains about your prices, you're almost certainly leaving money on the table.
What's the best way to raise prices on existing customers?
Give advance notice (60-90 days), explain the value they've received and any new benefits, grandfather legacy pricing for a transition period if needed, and start with new customers first. Most companies raise prices annually at contract renewal. The key is confidence—apologizing or over-explaining signals you don't believe in your value.
How do I determine the right price for a new product or service?
Start with the customer outcome: what problem does it solve and what is that worth? Research competitor pricing for reference points. Talk to potential customers about their willingness to pay. Test prices with early customers. For B2B, aim to capture 10-20% of the quantifiable value you create. You can always adjust—it's easier to lower prices than raise them.
Should I publish my prices or keep them private?
It depends on your sales model. Published pricing works well for transactional sales, smaller deal sizes, and self-service purchasing. Private pricing ('contact for quote') is better for complex solutions, enterprise sales, and when value varies significantly by customer. Many companies use a hybrid: published pricing for standard offerings, custom quotes for enterprise or complex deals.
How do discounts affect my business long-term?
Discounts train customers to expect discounts. They attract price-sensitive buyers who are harder to retain. They erode brand positioning and perceived value. A 10% discount requires 10%+ more volume to maintain the same profit (often much more at typical margins). Use discounts strategically and sparingly—for annual commitments, volume purchases, or strategic accounts—not as a default closing tactic.
What is price elasticity and why does it matter?
Price elasticity measures how much demand changes when price changes. Inelastic demand (elasticity less than 1) means customers aren't very price-sensitive—a price increase won't significantly reduce volume. Elastic demand means customers are price-sensitive. Understanding your elasticity helps you predict the impact of price changes and identify opportunities to raise prices without losing customers.
How often should I review and adjust my pricing?
At minimum, annually. More frequently if you're adding significant value, if costs are rising, or if you've never properly tested pricing. Many companies underprice for years because they set prices once and never revisited them. Build pricing review into your annual planning process alongside budgeting.
What's the difference between cost-plus and value-based pricing?
Cost-plus pricing adds a markup to your costs (e.g., costs $100, charge $150 for 50% margin). Value-based pricing charges based on customer value regardless of your costs (e.g., saves customer $10,000, charge $2,000). Value-based pricing typically captures more profit and aligns your incentives with customer success. Cost-plus is simpler but often leaves significant money on the table.
How do I handle competitors who undercut my prices?
Competing on price is usually a losing strategy—there's always someone willing to go lower. Instead, differentiate on value: better service, faster delivery, lower risk, deeper expertise, stronger relationships. Articulate why you're worth more. The customers who buy only on price are often the least profitable to serve. Let competitors have the low-margin business while you focus on customers who value quality.
Should I offer different pricing tiers or packages?
Tiered pricing can capture more value across customer segments. Good-Better-Best packaging lets customers self-select based on their needs and budget. The key is clear differentiation between tiers—customers should understand why the premium tier costs more. Limit to 3-4 tiers to avoid decision paralysis. Ensure each tier is profitable, not just the top tier.
Need Help Optimizing Your Pricing Strategy?
Eagle Rock CFO helps growing businesses capture more value through strategic pricing. From pricing analysis to implementation support, we bring CFO-level pricing expertise to companies ready to improve profitability.
Schedule a Consultation