Your gross margin is 28%. Industry leaders in your space operate at 45-50%. You're delivering quality products, meeting deadlines, and keeping customers happy. So why are you leaving so much money on the table?
The answer usually isn't that you're inefficient or that your costs are out of control. It's that you're not pricing strategically. You're using cost-plus formulas without understanding true costs, matching competitor prices without knowing your value proposition, or maintaining legacy pricing that no longer reflects market realities.
Here's the truth that many manufacturing owners resist: you're probably significantly underpricing at least some of what you sell. And the impact isn't small. Strategic pricing improvements routinely increase gross margins by 5-10 percentage points, and in many cases even more. For a $5 million manufacturer, moving from 28% to 38% gross margin means an additional $500,000 flowing to your bottom line annually—without selling a single additional unit.
This guide shows you exactly how to analyze your pricing systematically, identify where you're leaving money on the table, and implement strategic pricing that dramatically improves margins without losing customers.
Before diving into solutions, it's worth understanding why pricing problems are so common in manufacturing.
Many companies price based on incomplete cost information. You know your material costs because invoices make those obvious. But do you really know the fully-loaded cost including direct labor, overhead allocation, equipment depreciation, scrap and rework, quality inspection, and shipping? Most manufacturers significantly underestimate true product costs, which means cost-plus pricing formulas start from the wrong baseline.
There's also a widespread fear of losing business to cheaper competitors. This fear often exceeds reality. Yes, some customers buy purely on price, but many value reliability, quality, technical capability, and relationship more than marginal cost differences. When you assume every customer will flee over a 10% price increase, you price for the most price-sensitive segment and leave money on the table with everyone else.
Inertia plays a role too. Pricing established five years ago might have made sense then, but materials costs have increased, labor costs have risen, and your capabilities have improved. Yet the prices remain unchanged because "that's what we've always charged" or "that's what the market will bear." Often, the market will bear considerably more than you think—but only if you test it.
Finally, many manufacturers lack the analytical capabilities to price strategically. Without understanding margin by customer, product, or order type, you can't identify which pricing needs adjustment. You end up applying blanket approaches when what you need is surgical precision.
Strategic pricing starts with knowing what things actually cost. Not just material costs, but fully-loaded costs that include every expense required to produce and deliver products.
Begin with direct material costs, which are usually the easiest to track accurately. But make sure you're including scrap and waste, not just theoretical material usage. If you generate 5% scrap on average, your material cost is 5% higher than invoice prices suggest.
Direct labor costs require more careful analysis than most manufacturers apply. You need to know not just wages, but the fully-loaded cost including payroll taxes, benefits, insurance, and the time spent on this specific product. If John spends 3 hours on a job but you pay him for 8 hours including breaks, meetings, and training, what's the true labor cost? The calculation of labor and overhead costs needs precision for accurate pricing.
Overhead allocation is where things get tricky. Your facility costs, utilities, equipment depreciation, quality control, engineering support, and administrative functions all need to be allocated to products somehow. Many manufacturers use simple approaches like "overhead equals 150% of direct labor cost," but this often misrepresents true costs, especially as product mix and manufacturing processes vary.
Better overhead allocation considers the actual resources different products consume. A simple part that runs through one machine for 5 minutes consumes far less overhead than a complex part requiring multiple setups, engineering support, and extensive quality checks. Activity-based costing provides more accurate overhead allocation, revealing which products truly drive costs and which are less expensive than simple formulas suggest.
Don't forget hidden costs like warranty claims, returns and rework, technical support, and expedited shipping. These costs are real and often correlate with specific products or customers. Including them in cost analysis reveals the true profitability picture.
With accurate cost information, you can analyze margins systematically to identify pricing opportunities. Comprehensive margin analysis should examine multiple dimensions to understand where you're making money and where you're not.
Look at margin by product or product line. Which items deliver strong margins above 40-50%? Which barely break even? Often you'll discover that products you thought were profitable actually lose money when you account for all costs, while other seemingly low-margin items actually perform well.
Analyze margin by customer. Some customers consistently order high-margin products, pay promptly, and require minimal support. Others order low-margin items, negotiate aggressively, pay slowly, and consume engineering resources. The latter group might be destroying profitability even if they represent significant revenue.
Examine margin by order size. Small orders often lose money because setup, processing, and shipping costs consume any gross margin. Understanding your minimum profitable order size helps you implement appropriate minimums or surcharges for small orders.
Consider margin by channel or market segment. Direct sales might yield different margins than distributor sales. Certain industries or applications might command premium pricing while others are highly competitive. This analysis helps you focus sales efforts on the most profitable opportunities.
Time-based analysis reveals trends that point toward pricing needs. Are margins eroding on specific products or customers over time? This suggests either cost creep that pricing hasn't kept pace with, or competitive pressure driving prices down. Either way, it requires action.
Armed with accurate cost and margin data, you can implement pricing strategies that dramatically improve profitability.
The most powerful pricing approach focuses on value delivered rather than cost incurred. What problem does your product solve for customers? What would it cost them to solve that problem differently? What's the financial impact of your solution working well versus poorly?
A component that prevents expensive downtime might cost you $50 to make, but it delivers $5,000 in value to your customer. Pricing at $75 based on cost-plus might be leaving $200 or more on the table if customers would readily pay $250-300 for something that saves them thousands.
Value-based pricing requires understanding your customers' economics and articulating value clearly. It works best for differentiated products where you offer capabilities, quality, or reliability that competitors don't match. The more you can quantify value delivered, the more pricing power you have.
Not all customers should pay the same price for the same product. A Fortune 500 company with massive volume, simple requirements, and strong payment history might justify competitive pricing. A small customer with complex requirements, small orders, and slow payment deserves premium pricing reflecting the additional cost to serve.
Segment your customers based on factors like order size and frequency, payment terms and history, technical complexity and support needed, relationship length and potential for growth, and price sensitivity versus value sensitivity. Then develop pricing strategies appropriate for each segment.
High-value strategic customers might receive competitive pricing on standard products but premium pricing on custom work. Small transactional customers might face minimum order requirements or surcharges that ensure profitability. Price-sensitive customers get quoted based on your best cost position, while value-oriented customers are quoted based on solution value.
If you're using cost-plus pricing, make sure it's sophisticated enough to reflect actual costs. Standard markups of "materials times 2.5" or "cost plus 40%" rarely capture true economics across diverse products.
Instead, develop cost-plus formulas that account for complexity, material costs, setup and run time requirements, quality and inspection needs, and engineering or technical support. More complex products with higher touch requirements should carry higher markups than simple, high-volume items.
Update your pricing regularly to reflect cost changes. If steel prices increase 20%, your pricing for steel-intensive products needs adjustment. Waiting months to update pricing means you're absorbing cost increases in your margin, which is exactly backward.
Many manufacturers haven't raised prices in years because they fear customer backlash. The reality is that thoughtful, well-communicated price increases are usually much less disruptive than you expect.
Start with customers where you deliver significant value or where you're clearly underpriced relative to value delivered. Increases of 5-15% are usually quite sustainable if your quality and service are strong. Customers might grumble, but most will accept it, especially if you communicate it as a general adjustment to rising costs.
For customers who push back hard, that's valuable information. If they threaten to leave over a 10% increase, they were probably never profitable customers anyway, and losing them might actually improve your bottom line once you account for all the costs they generate.
Knowing you need better pricing is one thing. Implementing changes successfully requires strategy and careful execution.
Don't announce across-the-board price increases to all customers simultaneously. Instead, test pricing changes with smaller customers or on specific products where you have strong competitive positioning. Learn what works, how customers respond, and what messaging is effective before rolling changes out broadly.
This testing approach also helps you identify truly price-sensitive customers versus those who accept increases readily. That information refines your customer segmentation and helps target future pricing strategies.
If you have long-term contracts or outstanding quotes at old pricing, honor them. The goodwill from honoring commitments exceeds the short-term margin you preserve by trying to renegotiate. But make clear that new orders will reflect updated pricing, giving customers time to adjust expectations.
If you know your quality, delivery, or service has gaps, fix those before implementing significant price increases. It's much easier to justify premium pricing when you deliver premium value. Raising prices while delivering mediocre service invites customer defections.
Sometimes you can increase effective pricing without raising stated prices by removing value-adds you previously included free. Expedited delivery, engineering support, consignment inventory, extended payment terms, free shipping—these all have costs. Consider charging separately for services that add value but aren't core to the product itself.
Periods of strong demand give you more pricing power than slow periods. When your capacity is tight and you have more opportunities than you can fulfill, that's the ideal time to raise prices or be selective about which business you accept. Conversely, when demand is soft, you might need to be more competitive, but you can still segment customers and protect margins on your best business.
As you implement pricing changes, track the results carefully to understand what's working and what isn't. Monitor overall gross margin percentage and trend to see if changes are moving it in the right direction. Calculate the dollar impact on gross profit to quantify the value of pricing improvements. Track customer retention by segment to ensure pricing changes aren't driving away profitable customers you want to keep. Measure win rate on quotes to see if pricing is hurting your competitive position on new business.
Also watch order size and mix changes, as customers might respond to price increases by consolidating orders or shifting mix toward products where pricing remains more competitive. This is valuable information for refining your pricing strategy over time.
The goal isn't to implement perfect pricing immediately. It's to systematically improve pricing through testing, learning, and refinement over time, moving your margins progressively higher while maintaining or strengthening your competitive position.
Many manufacturers lack the analytical capability or time to conduct sophisticated pricing analysis internally. If you're struggling to calculate true product costs, if you have limited visibility into which customers or products are actually profitable, if you lack experience with strategic pricing approaches, or if you need help implementing changes without disrupting customer relationships, professional support can accelerate results significantly.
Fractional CFO services often include pricing and margin optimization as part of comprehensive financial management. An experienced CFO can build the cost models and margin analysis you need, develop pricing strategies grounded in data and market reality, help implement changes with minimal customer disruption, and track results to continuously refine your approach.
The investment in professional pricing expertise often pays for itself within months through margin improvements that flow directly to your bottom line.
Strategic pricing represents one of the highest-return opportunities available to most manufacturers. Unlike operational improvements that require capital investment and time to implement, or sales growth that requires landing new customers, pricing improvements drop directly to your bottom line immediately.
A 5 percentage point improvement in gross margin for a $5 million manufacturer means $250,000 in additional gross profit annually. That's transformational for most mid-sized manufacturers, funding growth investments, improving cash flow, or simply delivering the profitability you should have been earning all along.
The manufacturers who dramatically improve margins through better pricing share common characteristics. They understand their true costs with precision, they analyze profitability across multiple dimensions to identify opportunities, they price based on value delivered rather than just cost incurred, and they implement changes strategically rather than haphazardly.
Most importantly, they recognize that their current pricing probably leaves significant money on the table, and they're willing to test and learn to capture it.
At Accounovation, we help manufacturing companies implement strategic pricing analysis and optimization as part of comprehensive financial management. Our team brings deep expertise in manufacturing cost accounting, margin analysis, and strategic pricing approaches that work in competitive markets.
We can help you calculate true product costs with accuracy, analyze profitability across customers and products to identify opportunities, develop pricing strategies that improve margins without losing key customers, implement changes that stick while maintaining strong relationships, and track results to continuously refine your approach.
Ready to discover how much margin you're leaving on the table? Contact Accounovation today to schedule a pricing analysis consultation. Let's work together to capture the profitability your manufacturing business deserves through strategic pricing that reflects the real value you deliver.