Pricing & Margins
Set prices that protect your margins — grounded in what it truly costs to serve each customer and product.
What is Cost-Informed Pricing?
Cost-informed pricing means setting prices based on a rigorous understanding of what it costs to deliver a product or service to a specific customer. It goes beyond standard costing to include the full cost-to-serve: logistics, account management, customisation, payment terms, and returns.
Why It Matters
Most companies set prices based on competitor benchmarks, intuition, or historical rates — without knowing whether those prices cover their true costs. A 2% improvement in pricing typically generates more profit improvement than a 10% increase in volume.
Maturity Levels
Where does your organisation stand?
Intuitive
Prices set by market benchmark or gut feel. No cost-informed view of margin by product or customer.
Standard Cost
Prices based on standard costs plus margin target. Overhead not fully reflected.
Cost-to-Serve Aware
Full cost-to-serve used for key pricing decisions. Margin tracked by segment.
Dynamic Pricing
Prices updated dynamically based on real cost data. Margin managed actively by customer and product.
How to Improve
Calculate True Cost-to-Serve
Use TDABC to calculate the full cost of serving each customer or product category — including all direct and indirect costs.
Identify Margin Erosion Points
Analyse your price waterfall: list price, discounts, rebates, special terms. Find where margin is leaking.
Reprice with Confidence
Use cost data to defend pricing decisions internally and with customers. Focus repricing effort on high-volume, low-margin segments.
Comparing Approaches
| Pricing Approach | True Cost Basis | Customer-Level Margin | Defensible Logic |
|---|---|---|---|
| Market-Based Pricing | ❌ | ❌ | ⚠️ |
| Standard Cost + Markup | ⚠️ | ❌ | ❌ |
| TDABC Cost-to-Serve Pricing | ✅ | ✅ | ✅ |
Frequently Asked Questions
What is the price waterfall?
The price waterfall shows how you move from list price to realised margin after all discounts, rebates, freight allowances and special terms. Many companies discover their effective net price is 15-30% below list when they map this for the first time.
How much does better pricing improve profitability?
Research by McKinsey shows that a 1% improvement in price realization improves operating profit by 8-11% for the average company — more than equivalent improvements in variable costs or volume.
Should I raise prices or reduce costs first?
Both matter, but pricing is usually faster to implement. Once you know your true cost-to-serve, you can identify which customers and products are underpriced and build a case for repricing.
How do I handle customers who resist price increases?
Segment your response. For profitable customers with pricing power concerns, offer value demonstration. For unprofitable customers, a price increase is the right outcome — either they accept it or they exit at lower cost to you.
Related Topics
Are your prices covering your true costs?
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