There is an idea that is repeated in many budget meetings: "First let's fix the costs; then we see the price." I myself was a staunch defender of this thought. Sounds sensible... until you do the calculation calmly and realize something uncomfortable, especially for me who have dedicated my whole life to costing, and that is that in most businesses, the price moves profitability with a disproportionate force compared to comparable improvements in efficiency or cuts.
In fact, an oft-cited rule of thumb in pricing consulting says that a 5% increase in pricing (without losing volume) can raise profit by 30% to 50%. I'm not saying that costing doesn't matter (it would be irresponsible). What I argue – and I will defend it in this article – is that costing puts the floor on you, but pricing defines the ceiling.
And here's where it gets interesting: most companies are extraordinarily disciplined at measuring costs... but surprisingly informal to decide prices. Andreas Hinterhuber sums it up with a phrase that hurts me (because I've seen it as it is): "managers spend three to five times more effort on revenue growth and cost reduction than on pricing."
So, if the price moves the margin more... why do we treat it as if it were an "after-the-minute variable"?
>> Do you know the actual cost of each critical process in your business? <<
If I had to convince an executive committee in five minutes, I would use a simple reasoning: Price hits profit directly, because it acts on the entire volume sold. Cost (even when you reduce it) often has friction: contracts, capabilities, quality, service, people, technology, suppliers.
McKinsey lands it with a brutal comparison using the typical economics of an S&P 1500 company: a 1% increase in price (maintaining volume) can generate approximately an 8% increase in operating profits, with an impact greater than reducing variable costs, 1% and more than three times the impact of increasing volume. 1%.
Think of it this way: when you improve price, you are not pushing a gear... You're moving the axis. And if you want an even more direct figure: Hinterhuber documents that on average, a 5% increase in price can translate into a ~22% improvement in operating profits.
The real implication is not "let's raise prices and that's it." The real implication is: if pricing is wrong, your entire efficiency effort can become financial cosmetics.
>> What is the Difference Between Job Order Costing and Process Costing? <<
Here comes a truth that we sometimes don't want to say out loud: Cost reduction has diminishing returns. The first cut is usually easy (obvious expenses, duplications, messy purchases). The second is already more surgical. The third is beginning to hit the bank: service, quality, times, turnover, commercial capacity.
McKinsey says it elegantly but forcefully: in many companies there is "little juice" left of cost-cutting and pricing becomes one of the few levers still underused to improve revenues.
And yet, we continue to react with the same pattern: If the margin falls → "let's squeeze costs." And if the margin does not improve, → "let's tighten more".
Meanwhile, the margin "leakage" due to discounts, concessions, rebates, incentives and commercial conditions is still alive. (McKinsey develops it with the idea of the Pocket Price Waterfall: The real price you have left in your pocket after everything you give away in the transaction).
I like to say it like this because it changes the mind map right away:
The problem arises when we make cost-plus as if it were "strategy": "Cost + margin = price". That is not strategy, but rather accounting with commercial makeup.
And I don't say this to despise the ABC cost, on the contrary I am one of its biggest fans when used well – I have been doing it for 20 years. But its strategic role in pricing is limited: it gives you visibility of profitability by product/customer/channel; it helps you detect where you are subsidizing; It allows you to decide what you should stop selling or redesigning. But it does NOT tell you how much you can charge. In fact, in the world of serious pricing, there is a lot of emphasis on distinguishing:
Has it ever happened to you that a product "is expensive" according to the cost... but the market pays happily? This is usually a sign of perceived value (and that your costing is fulfilling its function: to give you the floor, not to dictate the ceiling).
There are companies that raise costs... and pray. On the other hand, there are companies that raise prices... and the market accepts it.
Warren Buffett said it without anesthesia: "if you can raise prices without losing business to a competitor, you have a great business; If you need a 'prayer session' to go up 10%, you've got a terrible deal." That's pricing power. And it's not magic, it's built. In fact, the same Hinterhuber/Liozu paper points to something that explains why so many companies "can't" improve pricing: Less than 5% of the Fortune 500 would have a dedicated pricing function, and less than 15% would do systematic pricing research.
Now add the recent market evidence: in Simon-Kucher's Global Pricing Study 2025, it is reported that the average price realization rate fell to 43%, and that only 40% of companies consider pricing as their main profit lever. Translation: Even when companies want better prices, many fail to capture them due to a lack of governance, business discipline, and execution.
I'm going to propose a simple, usable way, and —above all— less "cliché consultant", although I admit that the latter.
Before talking about "raising prices", I always ask: Where is the margin going today: discounts, mix, conditions, returns, logistics, service, financing? How much of the loss is pricing (capture) vs costing (structure) vs commercial execution (realization)? McKinsey shows why this matters: a small drop in price can knock down profits with equivalent force (the "saber" cuts on both sides).
The classic segmentation of a lifetime ("big vs small", "A/B/C") is usually weak to use in pricing. It works better for me to ask: Who buys in an emergency? Who buys by risk? Who buys for compliance? Who buys for continuity? Where does your offer avoid losses, not just "deliver profits"? You don't invent value, value lies in the customer's problem. Or in other words, in the problem that the customer avoids.
You don't need a perfect model, rather you need one that can stand up for itself.
And this is where costing helps: it organizes your delivery and your structure, so that you do not sell value "at a loss".
If you only sell "one version", you force the entire market to pay the same... and you end up trading down. That's exactly why I present the typical steps:
This is not to follow a fad, rather it is architecture to capture willingness to pay.
One of the most powerful ideas in modern pricing is to separate:
Simon-Kucher repeats it forcefully: the problem is often the gap between ambition and execution, and that's why pricing needs real executive attention.
If I had to summarize my position in one sentence, it would be this: costing protects you from foolish decisions, but pricing allows you to really win. And be careful, I am not minimizing the importance of costing. Yes, you need models like ABC, visibility by product and customer, financial discipline, and control. All of this is what prevents the business from deceiving itself, subsidizing without realizing it and confusing volume with profitability.
>> What is ABC costing? And what advantages does it have over other costing methods? <<
The problem arises when the price is still decided by cost-plus, out of habit or out of fear of losing volume. That's where many companies fall into a silent paradox: every year they fine-tune the operation, every year the commercial pressure becomes more intense, and even so the margin stays the same... or even regresses. Not because they are doing "wrong" costing, but because they are trying to efficiently solve a problem that is actually one of value capture.
And the most ironic thing is that, many times, you don't need to sell more to improve profitability. What you need is to charge better, with more intention and with more method, for the value you are already delivering. When pricing is taken seriously – with strategy, structure and governance – it ceases to be a number at the end of a quote and becomes a real lever for profitable growth.
Throughout this article, I have defended an idea that, although uncomfortable for many, is difficult to ignore when viewed with data and experience: costing is indispensable, but it is not the main driver of profitability. Its strategic function is clear and limited: to protect the bottom line, avoid destructive decisions, and provide economic visibility. The mistake begins when it is asked to do something for which it was not designed: to dictate the price and, with it, the profit potential of the business. At that point, costing ceases to be a tool of discipline and unwittingly becomes a brake on profitable growth.
Pricing, on the other hand, operates in another dimension. It does not compete with costing; it complements and transcends it. It is the lever that directly connects the value that the customer perceives and pays for with the company's financial results. Ignoring it, treating it as a tactical decision, or delegating it without method is equivalent to leaving huge amounts of margin on the table. That is why, when margins erode, insisting exclusively on cuts and efficiencies is often an incomplete response: the structure is optimized, but value capture is neglected.
>> What is pricing and how does it differ from revenue management? <<
The final invitation is to change the mental framework of the problem. It is not about abandoning cost discipline, but rather about stopping using it as a substitute for a pricing strategy that was never developed. The companies that manage to sustain and expand their profitability are not necessarily the cheapest or the most efficient, but those that understand where they create value, for whom, and how to translate that into defensible and executable prices. When price ceases to be a "result" and becomes a strategic decision, margin ceases to be a coincidence... and begins to be a consequence.