For many business owners, growth is synonymous with increasing sales. The common perception is that by selling more, a company will naturally become larger and more profitable. However, research suggests that this is not necessarily the best path to growth. Instead, there’s a far more powerful tool that often goes overlooked: pricing.
In fact, finding a way to support higher prices, even by a small margin, can have a far greater impact on your business's growth than most realise. In this article, we’ll explore why price is such a critical driver, and why it can be far more effective than just increasing sales volume.
So, let’s dive into the surprising truth about why price is the ultimate lever for growth.
Price is the Biggest Lever for Increasing Profits — Over 3 Times More Powerful Than an Equivalent Sales Increase
The idea that price is a bigger lever for growth than sales might seem counterintuitive. However, research from the Harvard Business Review (HBR) backs this up with compelling data. After analysing 2,400 companies across various industries, HBR found that a 1% increase in price leads to an average 11.1% boost in operating profit. By contrast, a 1% increase in sales volume only generates a 3.3% improvement in profit. Research from McKinsey showed an even larger impact – a 1% price change giving a 22% increase in EBITDA.
Why does price have such a disproportionately large impact? It comes down to cost efficiency. When you increase sales volume, you incur extra costs - whether it’s the cost of acquiring new customers, producing more products, or delivering services. A price increase however, is pure margin. You’re not selling more products, but you’re making more money for each unit sold, which immediately drops to the ‘bottom line’.
The HBR findings highlight a critical lesson for small business owners: higher prices - even slightly higher - deliver significantly more profit. While it’s important to build your customer base and expand your market, focusing on pricing strategies, and developing offerings that can support premium prices, can be a fast and efficient route to growth.
And of course, it works in the other direction too – lower prices or excessive discounting can have the same enormous influence, this time a negative one, eroding profits. The HBR results suggest a 5% discount can reduce profits by a massive 55%.
Pricing is a Powerful Way to Support Working Capital Needs
Profits aren’t just about padding the bottom line. Crucially, they help businesses meet their day-to-day financial needs, especially when it comes to working capital - the funds required to keep operations running smoothly. Many businesses struggle with this, particularly if they rely on long payment cycles. Manufacturers, for instance, may spend money upfront on design, production and materials but then wait 60, 90, or even 120 days to receive payment from customers. If the business doubles in size, then twice as much money is absorbed in this way. This gap ties up working capital, putting pressure on the business’s financial stability. This also explains the statement: the quickest way to bankrupt a good company can be to double its sales.
Enhanced value products which support higher prices can ease this burden significantly. A premium price means more profit per sale, which leads to more available cash to cover working capital needs. More cash on hand not only allows you to cover immediate expenses, such as inventory and payroll, but also provides the flexibility to invest in growth opportunities such as staff training and product development without relying on external financing.
For small businesses, where cash flow can make or break the ability to operate efficiently, finding offerings that support premium prices can therefore be a game changer.
Profits Lead to Cash Generation, Fuelling Reinvestment and Compound Growth
The relationship between profit and growth is a simple yet powerful one: more profit means more cash to reinvest into the business. This reinvestment is what drives long-term, sustainable growth. Once again, whether it’s hiring more staff, upgrading technology, or improving customer service, the profits you generate from higher prices can be funnelled back into the business to accelerate expansion.
The key benefit of reinvestment is the potential for compound growth. Each reinvestment cycle improves your business's capacity to generate more revenue, which in turn creates more profit, and so the cycle continues. The more you invest, the more your company can grow.
The internal rate of return for a high growth business is often between 25% to 50%. That means that every penny you reinvest in your business gives a 25%-50% growth in value - or rate of return - each and every year. It effectively works like an interest rate. If you think about it, that’s an incredible increase in value.
Here is a quick example from my book: Let’s compare 2 companies. One company generates and reinvests the extra cash produced from higher prices. The other equally profitable company does not reinvest and either leaves the money in the bank or pays it out as dividends.
As we can see, the company that effectively reinvests into sales, staff training, product development and operations puts that money to work, compared to the company that made no use of the funds, perhaps leaving it languishing in a bank. The company that reinvested the capital has a far higher growth curve and is 3 times more valuable over the period.
With its direct link to generating funds for reinvestment, pricing can therefore be disproportionally important to growth due to this compounding effect.
Price is Often a Messenger of Quality and Effectiveness
The final, often overlooked, aspect of pricing is its role as a signal to your customers. Higher prices often convey higher quality, while lower prices can lead customers to perceive your offering as inferior. This psychological association between price and quality is critical, especially in competitive markets.
Imagine a customer deciding between two products: one priced at £100 and another at £50. Without knowing much else about the products, the customer may automatically assume the higher-priced product is of better quality. In many industries, price is a proxy for quality, and setting your price too low can inadvertently send the wrong message.
For small business owners, this means that pricing decisions should be made carefully. A low price might attract price-sensitive customers, but it can also erode your brand’s value and lead to much lower margins. Conversely, a higher price can attract customers who are willing to pay for quality, they may even be more likely to become loyal, repeat buyers.
Setting the right price involves understanding the market, knowing your customers, and recognizing the value your business brings to the table. If your product or service is delivering superior value, don’t be afraid to set a price that reflects that.
Conclusion: Price Matters More Than Most Think
The surprising truth is that price is far more important for business growth than most people realize. It can drive growth and can define value perception. For small business owners, this insight can be transformative.
Professor David Falzani MBE has trained over 2,000 growth companies, leveraging his experiences as an entrepreneur, business consultant and Professor at Nottingham University Business School. His book, “Double Your Price: The Strategy and Tactics of Smart Pricing”, won Sales & Marketing Book 2024 in the Business Book Awards, and contains 10 practical exercises to help improve company pricing strategy.