The Impact of Pricing Strategy on Gross Margin: A Step-by-Step Approach
Your pricing strategy isn’t just about staying competitive — it’s one of the most powerful levers you control to shape your gross margins and overall profitability.
Yet, many businesses set prices based only on competitors, gut instinct, or historical norms.
In this guide, we'll show you how pricing directly impacts your gross margin and provide a clear, step-by-step method for making smarter pricing decisions.
Why Pricing Matters More Than You Think
Every pound added to your selling price (without increasing costs) goes straight to your gross margin.
Even a small increase in price can drive major improvements in profitability — often more effectively than chasing higher sales volumes.
How Pricing Directly Impacts Gross Margin
Simple Illustration:
- Product Cost = £50
- Current Selling Price = £100
- Gross Margin = ((100 - 50) ÷ 100) × 100 = 50%
If you increase the selling price by 5% to £105:
- New Gross Margin = ((105 - 50) ÷ 105) × 100 ≈ 52.38%
Result: A small price tweak raises gross margin by over 2 percentage points without changing your cost base.
Step-by-Step Approach to Smarter Pricing
Step 1: Know Your Costs Exactly
Before setting or adjusting prices, understand your true COGS:
- Raw materials
- Labour
- Packaging
- Shipping
- Direct overheads
Tip: Use rolling averages to smooth out seasonal or supplier price fluctuations.
Step 2: Identify Gross Margin Targets
Set minimum gross margin targets by:
- Benchmarking industry standards
- Accounting for your overhead structure
- Considering future investment needs
Example Target:
“Maintain a minimum gross margin of 45% across all product lines.”
Step 3: Understand Your Value Proposition
Price should reflect perceived value, not just cost plus a margin.
- What problems does your product/service solve?
- How unique is your offering?
- Can you justify premium pricing based on value?
Reminder: Customers pay more for solutions, not just products.
Step 4: Segment Your Offerings
Different products/services warrant different pricing strategies.
Step 5: Test Price Changes Carefully
- Use A/B pricing: Offer different prices to different customer groups to gauge impact.
- Trial price changes in low-risk channels (e.g., email campaigns, limited-time offers).
- Monitor closely for sales velocity, customer feedback, and profitability shifts.
Step 6: Communicate Price Increases Strategically
If raising prices:
- Communicate added value: Highlight improvements, benefits, or service enhancements.
- Frame increases positively: E.g., “To continue delivering exceptional service…”
This maintains trust while protecting margins.
Common Pricing Mistakes That Erode Gross Margin
- Relying solely on competitor prices.
- Failing to adjust prices regularly despite rising costs.
- Over-discounting during slow seasons.
- Pricing all products/services with the same margin assumptions.
Final Thoughts
Pricing is not static — it’s a dynamic tool that shapes your business success.
A thoughtful pricing strategy enables you to:
- Strengthen gross margins
- Build financial resilience
- Invest confidently in future growth
Smart pricing protects more than revenue — it protects profitability.
Learn even more about optimizing your pricing and profitability:
- Mastering Pricing Strategy: How to Set Prices That Drive Profit Margins — Deepen your understanding of building profitable pricing models.
- Building a Pricing Strategy That Maximises Profit — Explore a full framework for setting and adjusting prices to maximize profit.
- Understanding Gross Margin — See how pricing decisions directly influence one of your most important financial metrics.
