The most common conversation in an SME boardroom is this one: "let's raise prices by 5%". The rationale seems unbeatable — contribution margin goes up immediately, the cost of operating does not change, the result flows straight to EBITDA. And in many cases, it works.
In many others, it does not.
This article is about the cases in which raising prices does not increase profit — on the contrary, it reduces it. If you are the owner, a partner, or the sales director of a mid-sized company, you have probably lived through this: you raised prices, watched volume fall more than expected, the mix deteriorate, an anchor client leave, and by the end of the quarter the margin was tighter than before.
The useful question, therefore, is not "should we raise prices". It is "in which slices of our portfolio does raising prices increase profit, and in which slices does raising prices reduce profit". That distinction is what separates analytical repricing from repricing on impulse.
What economics says — and what many people ignore
The technical answer lies in the price elasticity of demand. For products with inelastic demand (the customer buys roughly the same quantity regardless of price), raising prices increases revenue and profit. For products with elastic demand (the customer cuts consumption quickly as prices rise), raising prices reduces revenue — and, if the volume drop is large enough, it reduces profit too.
The general rule, in short: if elasticity in absolute terms is greater than 1, raising prices reduces revenue. If elasticity is less than 1, raising prices increases revenue. And to calculate the impact on profit, you need to cross that with the product's contribution margin — because a high-margin product can withstand more volume loss than a thin-margin product.
Elasticity is not a characteristic of the industry. It is a characteristic of the product, the customer, the channel, and the moment.
This matters because SMEs almost never calculate elasticity. Pricing decisions are made by benchmark ("the competitor raised 4%, let's raise 3%") or by instinct ("it's been a year since I touched prices, it's time"). Both ignore the fact that the same company has products and customers with radically different elasticities — and a uniform increase treats them all the same.
Three typical patterns in which raising prices destroys profit
1. A product with concentrated anchor clients
When 15% to 30% of revenue comes from 2 or 3 anchor clients — very common in B2B services SMEs, subcomponent manufacturers, and specialized suppliers — a uniform increase captures the small clients but triggers renegotiation (sometimes rupture) with the large ones. The price gain on the small clients rarely offsets the loss of the large ones.
How to identify it: if your 5 largest clients account for more than 40% of revenue, you have concentration risk. A blanket increase is imprudent. It makes more sense to negotiate individually with the anchors — and reprice freely across the small clients.
2. A commodity product with thin margins
In commodities and semi-commodities, typical elasticity is high (2, 3, or more). For these products, even a small increase triggers a proportionally larger drop in volume. If contribution margin is below 25%, a 5% increase can turn growing revenue into shrinking EBITDA.
A simple numerical example: you sell an industrial input with a 20% contribution margin. Estimated elasticity = 2.5. If you raise prices by 5%, volume falls 12.5%. New revenue is 5% × 87.5% = higher, but contribution margin per unit grows little because fixed costs stay the same — and, with volume 12.5% lower, the allocated fixed cost per unit goes up. EBITDA falls, even with higher revenue per unit.
3. A product tied to a larger purchase decision
Ancillary services, maintenance contracts, and secondary products frequently have low elasticity in isolation — but high elasticity when tied to the main decision. Example: maintenance for a piece of equipment seems inelastic, but when the customer decides to switch maintenance suppliers, they usually also switch suppliers of the main equipment at the next purchase.
Raising the price of maintenance looks safe in the short term. But if you supply both the maintenance and the equipment, and the maintenance starts to irritate, you lose both at the next renewal. An isolated elasticity analysis underestimates this effect.
A practical framework for SMEs
You do not need a complex econometric model to make better pricing decisions. You need structure. We suggest four steps:
- Segment the portfolio into 4 quadrants by (a) the product's contribution margin and (b) the degree of customer concentration / estimated elasticity. That gives 4 combinations — each calling for a different pricing strategy.
- In the high-margin, fragmented-customer quadrants, you have the greatest freedom to reprice. Start there. Price gains tend to convert into profit.
- In the concentrated-customer quadrants, negotiate individually with anchor clients — differentiated adjustments, multi-year contracts, specific terms. A blanket approach is a recipe for friction.
- In the thin-margin, high-elasticity quadrants, consider lowering prices instead of raising them. Counterintuitive, but in many cases it is what makes EBITDA grow.
How to know your company is in the wrong scenario
Three signs suggesting your pricing decisions are destroying value without you noticing:
- Your 3 largest clients came to negotiate jointly in the last year (a pattern of future rupture).
- Your operating margin fell over the last 12 months despite growing revenue.
- The internal conversation about prices happens once a year, with a "standard industry adjustment" — with no portfolio analysis.
If two of these three are present, it is worth running a structured elasticity analysis. It usually reveals that 20% to 40% of the portfolio could be repriced up or down with meaningful EBITDA gains — without touching the rest.
How SPCG works with analytical pricing
Our Growth & Sales practice includes a Portfolio and Pricing Diagnostic service, delivered in 4 to 6 weeks. We analyze profitability by client, product, and channel, estimate elasticities by segment, and deliver a clear map of where to reprice (up or down) and where to hold. Our clients typically identify between 3% and 6% of EBITDA gain in the first 6 months after implementation — without requiring volume growth.
If you recognize the signs in this article, a free 45-minute exploratory conversation can help map your situation preliminarily.