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Capture and defend margin

Pricing moves

Price rises, discounting, dynamic and value pricing

Examples checked

In one minute

Changing what you charge, how often, and on what basis.

The big idea: Price is the fastest lever on profit, because a price rise drops almost straight to the bottom line. Whether a rise pays depends on how many customers you lose, and the higher your margin, the fewer you can afford to lose, because each lost sale gives up more.

Works when
When customers value the product more than its price, rivals follow or cannot undercut, and you know how many customers will leave.
Fails when
When rivals hold their price and take your customers, discounts train customers to wait for sales, or the move looks unfair.
Check this number first
Contribution margin. The higher it is, the more each lost sale costs, so the fewer customers you can lose before a price rise stops paying.
In the worked example
Contribution after the price rise: USD 322 (USD millions a year). See it add up

What it is

Pricing moves include raising list prices, discounting, dynamic pricing (changing prices with demand, as airlines and ride-hailing apps do), and value pricing (setting price by what the product is worth to the customer, not by what it costs to make). Price elasticity is how much demand changes when price changes.

  • Price rise. Raise prices across the board, often when costs rise or after adding value.
  • Discounting and promotions. Lower prices for a time or for some customers to win volume.
  • Dynamic pricing. Prices that move with demand, time or available capacity.
  • Value pricing. Price set by the value to the customer, for example a share of the money a product saves.

Why companies do it

The economic logic, most important first. A move usually rests on one or two of these.

  • Pricing power. A 1 percent price rise with no lost volume adds 1 percent of revenue to profit, far more than most cost cuts.
  • Utilisation. Dynamic pricing fills empty seats, rooms and slots, and earns more when demand peaks.
  • Margin capture. Value pricing captures part of what the product is worth to the customer.

When it creates value, and when it destroys it

Creates value when

  • Customers are not very sensitive to price, because of a brand, switching costs or few alternatives.
  • Rivals follow the rise, or cannot match the value.
  • Discounts are targeted at customers who would not have bought otherwise.
  • Dynamic pricing is used on perishable capacity and explained clearly.

Destroys value when

  • Customers leave faster than the price rise makes up for.
  • Discounts go to customers who would have paid full price.
  • A price war starts and every player ends up with lower margins.
  • Customers or regulators see the pricing as unfair or opaque.

The numbers to check

Ask for these, in this order, before you recommend the move.

  1. Contribution margin. The higher it is, the more each lost sale costs, so the fewer customers you can lose before a price rise stops paying.
  2. Breakeven volume loss: price change / (margin + price change). The most volume you can lose and still gain.
  3. Price elasticity or switching data. How many customers actually leave when prices rise.
  4. Rivals' prices and likely response. Will they follow or undercut?

Worked example (illustrative)

Rounded numbers for a made-up business, shaped like real ones. Positive lines add to profit; negative lines are costs.

A company has USD 1,000 million of sales and USD 700 million of variable costs, so a 30 percent contribution margin. It raises prices 5 percent and expects to lose 8 percent of its volume.

Worked example for Pricing moves: price rises, discounting, dynamic and value pricing, in USD millions a year. Illustrative figures.
LineUSD millions a year
New sales: USD 1,000 million x 1.05 price x 0.92 volumeUSD 966
Variable costs on the lower volume: USD 700 million x 0.92minus USD 644
Contribution after the price riseUSD 322

Check: the lines above add up to the total.

The numbers that decide it

Contribution before: USD 1,000 million minus USD 700 million
USD 300
Most volume it can lose and still gain: 5 / (30 + 5)
14.3 percent
Extra volume a 5 percent price cut would need just to stand still: 5 / (30 minus 5)
20 percent

So what: Sales fall from USD 1,000 million to 966 million, yet contribution rises from USD 300 million to 322 million. With a 30 percent margin the company can lose up to about 14 percent of its volume before the rise stops paying. A price cut works the other way: a 5 percent cut needs about 20 percent more volume just to earn the same contribution.

Real examples

Companies that made this move, by region, with what happened and a source checked on the date shown.

How to recommend it in a case

Answer first, then the reasons with numbers, then the risk and the next step. Three sentences, said out loud.

I recommend the 5 percent price rise, because even if we lose 8 percent of volume, contribution rises from USD 300 million to about USD 322 million.

With a 30 percent margin we can lose up to about 14 percent of volume before the rise stops paying, and our churn data suggests losses near 8 percent.

The risk is that our main rival holds its price and takes more customers than expected; next I would test the rise in two regions and watch switching weekly.

The numbers to quote: Contribution margin; Breakeven volume loss; Expected volume loss; Rivals' likely response.

The figures in the answer come from the illustrative worked example above. In a case, use the client's own numbers.

Classic interview traps

  • Judging a price rise by the fall in sales. Look at contribution, not revenue.
  • Forgetting rivals: a price rise that rivals do not follow can lose far more volume than planned.
  • Assuming discounts bring new customers. Many discounts go to people who would have bought anyway.
  • Using the breakeven formula with the gross margin instead of the contribution margin.

Where it is common

Sources

Every source was opened and the example confirmed on the date shown. Worked examples are illustrative and use no company's figures.

  1. 1.Costco Wholesale, press release (Exhibit 99.1 to Form 8-K, US SEC), 10 July 2024 (opens in a new tab)Checked
  2. 2.Costco Wholesale, fourth quarter and fiscal year 2025 operating results, 25 September 2025 (opens in a new tab)Checked
  3. 3.Reliance Industries, media release on second quarter 2024-25 results, 14 October 2024 (opens in a new tab)Checked
  4. 4.Ryanair Holdings, Q1 FY25 results, 22 July 2024 (opens in a new tab)Checked
  5. 5.Sea Limited, fourth quarter and full year 2024 results, 4 March 2025 (opens in a new tab)Checked
  6. 6.Tesla, Q1 2023 Update, April 2023 (opens in a new tab)Checked

Practise it

Where this move comes up in cases

Related moves