Pricing is Power

As operators, most of us have three levers in our heads:

• Sell more

• Cut costs

• Change price

The first two often feel like progress. “We’re growing.” Or, “We’re getting lean.” Changing price, by contrast, can induce anxiety. “Are we being greedy? Will customers revolt?” But if you care about durable profit and the health of the business, pricing is the lever you can’t afford to treat as taboo. 

Hermann Simon, who’s spent a lifetime studying pricing, puts it bluntly: “There is nothing that has a higher impact on profits than the right price.”

And, research backs that up. On an average P&L, a 1% increase in realized price can raise operating profit by roughly 8%-9%, assuming volume holds (for the record, that’s a 50% greater impact than a decrease in variable costs and worth more than three times as much as a 1% increase in volume). But, up to 30% of pricing decisions end up missing the mark. Blame it on gut instinct, a one-size-fits-all formula, reluctance to pass on increases in inputs, a misunderstanding of what customers are willing to pay…

That combination (huge leverage, misguided decisions) means that a ton of businesses are leaving a critical lever on the wrong setting – or entirely untouched.

What Pricing Really Does

Price is the gateway between your effort and the oxygen your company needs. In other words, it’s how your work turns into cash. Every dollar you charge has a job:

• Cover variable costs: the inputs, labor, and freight it takes to get something out the door.

• Pay for the machine you run: overhead, systems, leadership, and the inevitable “stuff breaks” fund.

• Fund tomorrow: product improvements, service upgrades, growth bets. 

• Leave something left over: profit and margin of safety.

Once fixed costs are covered, each extra point of price generally drops straight to the bottom line. That’s operating leverage: Small changes in realized price can expand (or crush) profit non-linearly.

You don’t need to be a spreadsheet zealot to harness the power of pricing changes. But it does require treating price as an organization-wide strategic decision, rather than a static number on a tag.

More Than “Can We Raise Prices?”

When we talk about “pricing power,” we don’t just mean the courage to send a price-increase email (although we have some advice about that).

Pricing power is your ability to earn higher prices with minimal damage to volume or relationship. That power tends to come from:

• Being small but important to your customer (i.e., solving a painful, non-optional problem where you’re hard to replace). 

• Clear differentiation in outcomes, reliability, or service – not just features.

• A brand and reputation that signal “these folks deliver.”

• The discipline to actually charge what your value is worth.

Across our portfolio and the businesses we meet, the best situations are those where they enjoy pricing power, strong margins, cash conversion, and room to grow. They get those advantages by solving real problems well and building the trust to keep doing what they’re good at.

You can see hints of pricing power in your own shop if you look: healthy backlog and utilization, customers pushing you for more (not less), competitors who have raised price and lived to tell the tale… If any of those things are true and your realized price hasn’t budged in years, odds are you’re underusing a powerful muscle.

Margin Is a Signal (Not a Sin)

Some operators think of high margins as a kind of embarrassment, a signal that they’re overcharging. 

In truth, though, margin is often how customers spot quality when they can’t see what’s under the hood. When the stakes are high or the job is gnarly, “suspiciously cheap” doesn’t feel like a good deal. It just feels risky. 

In our work, the red flags come more frequently from thin margins than generous ones. When you see a business where talk of margins is abandoned to chase growth at all costs, profits evaporate and the company starts consuming cash and increasing fragility.

There are absolutely wrong ways to manufacture margin: shrinkflation, nuisance fees, or quietly degrading the offer while holding the price. Think, short-term tricks that burn trust and brand equity while eroding relationships inside and outside the company.

So the goal here isn’t “charge whatever you can get away with.” It’s charge enough to reliably deliver what you promise, invest in getting better, and earn a fair return – without playing games. 

Doing that often requires higher prices, not lower ones.

The Reality: Most Pricing Is Leaky

Even when leaders say that margins are fine, the details frequently tell a different story. 

A few patterns we see over and over:

• List price ≠ pocket price. Discounts, terms, freight, rebates, and “one-time” exceptions quietly erode the actual price you collect.

• Average margins hide the outliers. The 50,000-foot view might look okay, but if you zoom in on the bottom 10% of deals, you see where value is being destroyed.

• Cost-plus breeds blind spots. If you start with a markup instead of understanding your value, ignore how price affects volume, and never revisit the math, as scale changes your cost structure, you’re leaving money on the table.

In smaller B2B and B2C businesses, where pricing is often owned by whoever built the first spreadsheet or whoever the customer talked to last, leaks can be significant.

The good news is that plugging the holes is fixable with basic moves: better measurement, cleaner policies, and small experiments.

Choose Your Battles: Pricing vs. Volume vs. Cost

We started this piece with the three levers you can pull to gain more profit: 1. Sell more units, 2. Cut costs, 3. Improve price realization.

All three matter. But they’re not created equal in either effort or impact.

• Volume is seductive but expensive. It asks you to add capacity, sales effort, working capital, and complexity. 

• Cost cutting has a floor. You can only squeeze so much before you hit bone, and you risk hurting quality and culture. 

• Pricing, done thoughtfully, can improve profit without adding complexity or hollowing out the product. That’s why a small price move often beats a big volume push or a heroic cost program.

Even knowing that pricing increases can have outsize effects doesn’t mean that you should slap 10% on everything tomorrow and call it good. As a lever, price deserves deep consideration and wide, low-stakes experimentation to ensure that you’re turning differentiation (in outcomes, in brand, in guarantees), smart segmentation, and disciplined transaction execution into durable profitability.

BUILDING YOUR “LAB”

This intro is the “why” behind this project. At Permanent Equity, we create tools for internal use, and this is no exception. Many a long hour has been spent discussing pricing at each one of our companies. 

The rest of the Pricing Lab is the “how.” For each topic, you’ll be able to dive into as much detail as you want – from a quick overview of “What it is,” “Why it matters,” and a case study to in-the-weeds research, frameworks, checklists, and signals to watch. We end with a tool or three. They’re low-stakes, relatively quick experiments in pricing that you can use with your team to start conversations, try out small changes, and figure out where, when, and how your pricing should change. Many of the worksheets include AI chat-based prompts to create your own spreadsheets and trackers for the tool so you can customize them to your business (for those without specific prompts, you can load the sheet into a chat and ask “Knowing my business, what would you do with this?”). In the subsequent installments, we’ll walk through:

Pricing Foundations

• How pricing ties into strategy, positioning, and market structure

• Why margins, unit economics, and contribution matter more than top-line bragging rights

How Do You Set Prices with Confidence?

• Basic frameworks for value-based pricing

• Understanding willingness-to-pay and elasticity without getting lost in the math

How Do You Raise Prices?

• When signals say it’s time

• How to communicate clearly and fairly

• How to test into higher prices instead of yanking the wheel

When Should You Lower Prices?

• The difference between thoughtful entry tiers and panicky discounting

• How to use promotions and breaks without training customers to expect them

How Can You Optimize Prices in a Changing Market?

• Tuning price, mix, terms, and structure as costs, demand, and competition shift

• Building a simple, sustainable pricing cadence into how you run the business

Who This Toolset is For

You don’t need a PhD in elasticity to make better choices. What you need is a working grip on:

• What it actually costs to get a product or service out the door 

• Where your pocket price is leaking

• How price moves interact with backlog, win rate, and customer mix

The goal of this series is to give you enough mental models and tools to run safer, smarter experiments (not to turn you into a full-time pricer. Yet.).

If you already think a lot about pricing…

You’ll find this useful as a way to:

• Pressure-test your current approach

• Borrow practical experiments you can run this quarter

• Tighten the connection between pricing, unit economics, and strategy, especially in environments with high uncertainty