The most common pricing mistake isn’t overcharging, it’s undercharging and most business owners don’t even realize it.
In McKinsey’s analysis of company economics they discovered that a 1% price increase generates an 8% increase in operating profits. Conversely, a 1% price decrease can eliminate 8% of operating profits currently being experienced.
This can create a serious psychological dilemma for a business owner.
When margins are slim the instinct is to typically keep prices unchanged so that you protect the volume of work being done and therefore secure continued cash flow. However, this only works in an environment where your operating expenses remain stagnant.
The U.S. Chamber of Commerce found that 75% of small businesses say rising prices have significantly impacted their business. The response however is to typically absorb these ever-increasing expenses instead of passing them through strategically.
Paradoxically, businesses that underprice their services to stay competitive often end up less competitive in their industry. Lower prices means lower margin which could be used on the very things that help to differentiate a business. Better employees and product improvement.
Pricing isn’t just a number on an invoice. It’s a statement about what a business believes it’s worth to its clientele.
The Psychology Behind the Price Tag
When looking to gain momentum with a new business the most common lever that is utilized to gain that initial clientele is pricing.
Many often find their first price by utilizing a cost-plus method in an effort to achieve a modest margin or simply by finding what competitors are charging and selecting a slightly lower price. This original pricing is often revisited too late as a business is growing.
Costs of materials, the scope of the work and even the value provided to the customer changes over time. This results in organizations losing out on significant revenue while contemplating what to do next.
The decision to raise prices is often a contentious one within a business and for a reason.
Psychologist Daniel Kahneman’s work on loss aversion shows that humans feel losses roughly twice as intensely as gains. This can be applied to entrepreneurs, often the fear of losing a customer to a price increase feels more real than the upside of healthier margins which could support growth which would further bolster the business.
Discussing pricing within a growing business often brings the human element of those involved to the forefront rapidly. Tackling conversations such as the true value being delivered to clientele, how customers will react, and the future of an endeavor that countless hours have been devoted can feel deeply personal.
The Quiet Cost of Charging Too Little
The damage that comes from misaligned pricing may not always be obvious, but rather it compounds over time in these areas.
1. Margin Erosion
A healthy small business will have profit margins between 7% and 10%. When margins are already that thin, underpricing by even a few percentage points can mean the difference between growth and stagnation.
2. Stunted Reinvestment
By not having healthy margins, there is no capital to reinvest. Hiring, marketing, and creating infrastructure are all necessary actions that must take place within a business but can be dramatically stunted by not having the required funds to leverage.
3. Distorted Public Perception
In the University of Michigan’s research on consumer anchoring it found that consumers often tie the value of a product or service to the expense of it. Which means for a company trying to make itself more attractive to consumers by lowering the cost of the services it may be having an adverse effect.
Rethinking How You Price
Strategy 1: Shift from Cost-Based to Value-Based Pricing
Action: Stop pricing based on what it costs to deliver. Start pricing based on what the outcome is worth to the customer.
Insight: If a company helps to solve a large problem that another entity is experiencing, the value between what it may cost to deliver that solution and what they are willing to pay is where margin can be found.
Strategy 2: Introduce Pricing Tiers
Action: Build a Good-Better-Best model as suggested by Harvard Business Review. A base option for price-sensitive buyers, a core offering for existing customers, and a premium tier for those willing to pay more.
Insight: This captures more of the market without discounting the core product. It also gives existing customers a path to spend more. Limiting the options that a clientele has is rarely a good thing and giving them the freedom to select what tier is best for them may provide additional insight into the demographic.
Strategy 3: Raise Prices Deliberately, Not Reactively
Action: Diligently review pricing at least annually, or quarterly if possible. This will allow for smaller incremental increases to the consumer and allow for the ability to track the exact appetite they may have towards the business.
Insight: Be transparent with existing clients. Let loyal customers know they’re getting preferential treatment. For example, “We’re raising prices, but your rate stays the same for the next 12 months.”
The Lever Most Businesses Overlook
Ultimately, pricing is a lever that can be utilized within a business and too often business owners wait until hardship strikes to begin exploring the idea.
By fully understanding the product, clientele, and value being offered to the consumer a company can pinpoint what pricing works best. As we discussed, even undervaluing current offerings by 1% in price can dramatically impact a company’s ability to serve its clientele and scale.
References
McKinsey & Company; “The Power of Pricing”: McKinsey & Company — “The Power of Pricing”
U.S. Chamber of Commerce / MetLife; Small Business Index Q3 2025: U.S. Chamber of Commerce — Small Business Index Q3 2025
Daniel Kahneman; Prospect Theory and Loss Aversion: University of Michigan — “Pricing Psychology: Deciphering Consumer Behavior”
David Falzani; “The Hidden Cost of Underpricing” via Small Business Charter: Small Business Charter — “The Hidden Cost of Underpricing”
Vena Solutions; 2026 Small Business Revenue Statistics: Vena Solutions — 2026 Small Business Revenue Statistics
Rafi Mohammed; “The Good-Better-Best Approach to Pricing” via Harvard Business Review: Harvard Business Review — “The Good-Better-Best Approach to Pricing”
Rafi Mohammed; “Expand Your Pricing Paradigm” via Harvard Business Review: Harvard Business Review — “Expand Your Pricing Paradigm”
SCORE; “How to Raise Prices Without Losing Customers”: SCORE — “How to Raise Prices Without Losing Customers”
Forbes / Bank of America; “Most Small Businesses Planning Price Hikes”: Forbes — “Most Small Businesses Planning Price Hikes”