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Two businesses. Both doing $5 million in revenue. Both delivering the same quality of service.
One could be worth $3 million more than the other.
And the difference might have nothing to do with how many customers they have, how hard their employees work, or how much the founder has invested in growing the company.
It could come down to pricing discipline.
We’ve been taught to think about pricing as a number. We calculate our costs, add a margin, look at what competitors are charging, and decide what seems reasonable.
Then we go back to running the business.
But when private equity looks at a company, they’re asking a very different set of questions.
How did you arrive at your prices? When was the last time you raised them? Who can approve a discount? How consistently does your team charge for the value you’re actually delivering?
And perhaps the biggest question…
Are your prices the result of intentional decisions, or have you just been avoiding uncomfortable conversations with customers?
Because those two approaches can produce dramatically different businesses.
What Pricing Discipline Has to Do With Your Business Value
Let’s put some numbers behind this.
Two companies each generate $5 million in annual revenue. Same service quality. Similar customers.
But one has built a consistent approach to pricing while the other has allowed discounts, outdated rates, and inconsistent decisions to accumulate.
A 10 to 15 percentage point difference in gross margin represents $500,000 to $750,000 annually.
If that difference flows through to EBITDA, at a 5x valuation multiple we’re talking about $2.5 million to $3.75 million in additional enterprise value.
Potentially millions more in value.
Now, that assumes the margin improvement actually reaches EBITDA and a buyer is willing to pay the same multiple. But the underlying point matters.
We spend so much time trying to grow revenue that we often overlook how much money we’re already leaving inside the business.
And there are three pricing mistakes that contribute to this.
1. We’re Pricing Based on Our Costs Instead of What Customers Value
This is probably the most familiar approach.
We figure out what it costs us to deliver a service, add the margin we want, and there’s our price.
Seems reasonable.
But think about what we’re actually doing.
We’re letting our expenses determine what the customer should pay, without really considering what the customer is getting.
Take a cleaning business.
Let’s say it costs $32 per hour to provide the service. The owner adds 25% to that cost and charges $40.
The business makes money, so the owner feels pretty good about the decision.
But what if the customer would willingly pay $55 or $60?
They’re not just buying an hour of cleaning. They’re paying for reliability, avoiding the hassle of hiring someone directly, and reducing the risk of getting poor results.
That has value beyond the hours worked.
And when we only look at our costs, we completely miss that.
In this example, the difference is $15 to $20 per hour.
Think about what that means across thousands of hours every year.
Think about what it means over three years.
That money could have been available to hire better people, improve the business, or build wealth outside the company.
Instead, we never collected it.
This is why pricing discipline begins with understanding the outcome we’re delivering, not simply calculating what it costs us to deliver it.
2. We Assume Competitors Know What They’re Doing With Pricing
Here’s another one I see owners fall into.
We want to know what everyone else charges.
So we look around, find the going rate, and position ourselves somewhere close to it.
Maybe a little cheaper because we want to win more business.
Maybe a little more expensive because we believe we’re better.
But have you ever stopped to ask how those competitors arrived at their prices?
What if they’re doing exactly what we’re doing?
What if they looked at another competitor, who looked at another competitor, who originally calculated their costs and added whatever margin felt reasonable?
Now we’re all following each other.
And nobody has actually established what the service is worth to the customer.
That’s the problem with anchoring our prices to the market.
We assume the market has already figured out the right answer.
But the average price only tells us what other businesses are charging. It doesn’t tell us whether they’re charging enough.
A company with better reliability, better service, and a stronger customer experience may have a legitimate reason to charge more.
Yet we hesitate because we don’t want to be the expensive option.
We’ve confused being competitive with being appropriately priced.
And those aren’t always the same thing.
3. We’re So Afraid of Losing Customers That We Keep Losing Margin
This is the one I think deserves the most attention.
Because the first two mistakes are about how we calculate prices.
This one is about us.
We know our costs have increased. We know we’re delivering more value than we used to. We might even know that customers would probably accept a higher price.
But we don’t raise it.
Why?
Because we start thinking about the customers we might lose.
And that fear feels responsible.
We’re protecting relationships. We’re protecting revenue. We’re making sure the business stays healthy.
Except there’s another side to that decision that we rarely calculate.
What does it cost us to keep everyone happy?
In a well-run service business, a price increase supported by clear customer value might produce churn of 2% to 8%, although the actual result depends on the business and its customers.
And the customers most likely to leave are often the ones who are most sensitive to price, least loyal, and sometimes the most expensive to serve.
So we have to ask ourselves something.
Are we protecting profitable relationships, or are we sacrificing margin to keep customers who were never particularly profitable in the first place?
Because every year we delay appropriate increases, the gap between what we deliver and what we charge can keep growing.
Meanwhile, our costs don’t stop increasing just because we’re uncomfortable having the conversation.
And that creates another problem.
We have less money to invest in the very things that make customers want to stay.
Better people. Better service. More reliable delivery.
Eventually, the decision we made to protect the business can actually weaken it.
Pricing Discipline Is About Building a Business Someone Else Would Want to Own
There’s something important here that goes beyond charging more.
When a buyer looks at your business, they’re trying to understand whether the profitability they’re seeing can continue after you leave.
If pricing decisions live entirely inside your head, if discounts happen whenever someone complains, or if nobody can explain why one customer pays more than another, that creates uncertainty.
And uncertainty matters when someone is deciding how much to pay for your company.
But if your team understands how prices are established, when exceptions make sense, and how to communicate value to customers, you’ve built something much stronger.
You’ve created a business that can make good commercial decisions without needing you to make every one of them.
That’s part of the shift from owner-operator to owner-investor.
We have to stop measuring our success only by how much revenue comes through the door and start asking how much of that revenue we keep, what the business is worth, and whether that value can survive without us.
So here’s what I’d encourage you to do.
Look at your pricing over the last three years.
Have your prices kept pace with the value you’re delivering? How many discounts have become permanent? And how many times have you avoided raising prices simply because you didn’t want to risk losing someone?
You might find that your biggest opportunity isn’t another customer.
It might be the customers you already have.
And that’s worth figuring out before you spend another three years working harder to grow a business that’s quietly giving away its own value.
Because imagine building a company for 20 years, taking all that risk, carrying all that responsibility, only to discover when you’re ready to sell that millions of dollars of potential value were left on the table.
All because we were afraid to ask for what our work was worth.
Justin D Maxwell provides family office and investment bank services to the lower midmarket to founders who want 8 or 9 figure net worths. You can learn more here: www.justindmaxwell.com or take our free assessment here: https://fielding.global/articles/diagnostic.html