Revenue growth can hide a pricing problem for a long time. Sales rise, the team is busy, and the board is pleased. Then costs catch up, and it becomes clear that some of the growth was bought with discounts, custom work and generous terms.
Pricing is one of the few levers that affects margin immediately. It is also one of the least-reviewed aspects of a business. This article sets out how to make pricing decisions that hold up as you scale.
Start with positioning, not price
Price is a signal. It tells buyers who you are for and what to expect. If your positioning is vague, price becomes the only thing left to compare, and you end up competing on cost.
Before changing any number, answer three questions plainly:
- Who is the product for? Name the customer segment where you win most often and keep customers longest.
- What do they value? This is the outcome they pay for, not the list of features you built.
- Who are the real alternatives? Include doing nothing, doing it in-house and using a spreadsheet, as well as direct competitors.
If you can answer these clearly, your price has something to stand on. If you cannot, a discount will feel like the only way to close. This is a foundational part of go-to-market strategy: pricing follows positioning, not the other way round.
Know your real margin
Most companies know their headline gross margin. Fewer know it by customer segment, product or channel. That is where pricing problems hide.
Build a view of contribution margin that includes:
- Direct delivery cost, including the time of people who deliver or support the work.
- Cost to acquire and serve, such as onboarding, account management and support load.
- Channel or partner fees, and payment processing costs.
- Discounts, credits and concessions actually given, not list price.
- The cost of payment terms, since late-paying customers tie up cash.
Once you see margin by segment, patterns usually appear. A small group of customers may generate most of the profit. Another group may take a disproportionate share of support time. Neither is visible in a single blended figure.
A financial model that links price, volume and cost lets you test these effects before you commit to them, rather than discovering them in the quarterly accounts.
Four pricing decisions that matter most
1. Choose a value metric
The value metric is what you charge for: seats, usage, projects, outcomes, or a flat fee. A good one rises as the customer gets more value, and is easy for them to understand and forecast.
Check it against your costs too. If your costs rise with usage but your price is flat, growth in your best customers will squeeze margin. If your price rises with something customers do not value, they will resist it.
2. Set floors and discount rules
Discounting is not the problem. Unplanned discounting is.
Decide in advance:
- The lowest price you will accept for each package, and why.
- Who can approve exceptions, and at what level.
- What you get in return for a discount, such as a longer commitment, upfront payment, a reference or a larger volume.
A discount with nothing traded for it is a permanent cut in margin. Track exceptions and review them monthly. If a discount is being used often, it is no longer an exception, and your list price may be wrong.
3. Package to guide choice
Good packaging helps customers choose the option that suits them and gives you a path to higher value. Typically this means two to four clear tiers, each aimed at a defined type of customer.
Keep the differences meaningful. Put the features that matter most to larger or more demanding customers in the higher tiers, and keep the entry tier simple. Avoid building a menu of add-ons that sales has to explain each time, because complexity slows deals and invites bespoke pricing.
4. Plan price increases
Many businesses avoid raising prices for years, then face costs that have moved well ahead of revenue. A small, regular, well-communicated increase is easier on customers than a sudden large one.
When you plan an increase:
- Segment customers, and decide who is affected first.
- Explain the reason in terms of value delivered, not your costs alone.
- Give notice and honour existing commitments.
- Prepare the sales and support teams for questions.
- Watch churn and win rates afterwards, and compare them with what you expected.
Often the reaction is milder than founders fear, but this depends on your market and customers. Test it with a segment before applying it widely if you are unsure.
Growth traps that erode margin
Certain growth patterns tend to damage margin quietly.
- Chasing the large logo. A big customer can demand custom terms, deep discounts and special work. Check that the contribution margin still makes sense after those concessions.
- Entering new segments at old prices. A price built for one type of customer may not cover the cost of serving another.
- Bundling services for free. Onboarding, training and support given away at the start often become expected permanently.
- Letting sales set price alone. Sales is rewarded for closing, not for margin. Align incentives so that margin counts, not just revenue.
- Copying competitors. Their costs, strategy and customers differ from yours. Their price is information, not instruction.
A simple review rhythm
Pricing is not a one-off project. A light but regular process is enough for most companies.
- Monthly: review discounts and exceptions, and any deals lost on price.
- Quarterly: review contribution margin by segment and product, and check that the value metric still fits.
- Annually: review positioning, packaging and a planned price change.
Keep a record of why each decision was made. This helps new team members and makes it easier to judge later whether a change worked.
It also helps to agree who owns pricing. In many growing firms nobody does, so decisions are made deal by deal. Assign one senior owner, bring in sales, finance and product, and give them clear authority and a regular forum.
What to do next
You can make progress this month without a large project:
- Pull the last two quarters of deals and calculate realised price against list price.
- Estimate contribution margin for your top customers and segments, including cost to serve.
- Write down your discount rules and approval levels, even if they are rough.
- Identify one segment where a price or packaging change could be tested.
- Name an owner for pricing and set the review rhythm.
If you would like an outside view on positioning, pricing and the margin impact of your growth plans, you can contact GainWells to discuss it.