Pricing and Profitability: The Make-or-Break Decisions for Your Business

Revenue vs. Profit: What Are You Really Optimising For?

For many business owners and managers, pricing can seem like a routine task: set it, forget it, and let the sales team or online channels do the rest. But in reality, pricing decisions go far beyond simply putting a dollar figure on a product or service. Whether your goal is rapid sales growth or maximising profit, price plays a critical role in shaping how customers respond, how much you sell, and ultimately, how healthy your bottom line looks.

Getting pricing right in today’s climate of rising costs and economic uncertainty has never been more critical, and with Australian insolvencies rising by 43% in 2024–2025, highlighting how slim margins and pricing missteps can quickly put businesses at risk. Set prices too low and you’re leaving money on the table. Set them too high, and customers may walk away.

Pricing is one of the most powerful yet often underused levers in a business. Unlike costs, pricing decisions can be adjusted quickly and directly affect:

• Revenue: The total dollars coming into the business.
• Profit: The money left after covering costs.
• Customer behaviour: Perception of value and willingness to buy.
• Market positioning: How your product or service is seen relative to competitors.

Depending on your business's objective, you may take very different approaches to pricing:

• Revenue and volume-focused pricing
• Profit maximising pricing

Let’s explore each in turn — and why understanding the difference matters.

Revenue and Volume Maximising Pricing. But What About Profit?

In revenue-focused pricing, the aim is to maximise sales volume and market share, sometimes at the expense of profit.

In highly competitive markets, price is often the weapon of choice. The common belief among business owners and managers is that no other marketing lever is better suited to increase sales volume quickly and effectively than price cuts. Business owners and managers may choose this approach when

• Entering new markets,
• Battling competitors for market share, or
• Building a customer base and brand awareness.

But let’s explore the effect of these price wars on profit.

Consider a chocolate maker, who currently sells 100,000 blocks of chocolate at $10 each. In pursuit of fast growth, the owner cuts prices by 10% to $9, expecting sales volume to rise by 20% to 120,000 units. Revenue increases — but what about profit?

The answer: while sales volume and revenue increased, this move would have a devastating impact on profit. The profit declines from $50,000 to $10,000, a whopping 80%! 

So, before cutting prices to boost sales, ask yourself:

• Have you borrowed against your own future sales? Customers may stock up during deals and reduce future demand.
• Have you trained customers to expect discounts and buy only when prices are low?
• Have you actually attracted new customers, or simply sold more to your existing ones?

While this approach can boost revenue and short-term cash flow, over time, if costs are not tightly controlled or if price sensitivity increases, your business's profitability can suffer significantly with dramatic consequences.

Profit Maximising Pricing

While chasing sales and market share can be tempting, many owners and managers eventually shift their focus from volume to what matters most — profit.

Profit maximising pricing takes a different view. Rather than you aiming to sell more at any cost, the objective is to find the price point that delivers the highest profit, even if that means selling fewer units. 

At the core of this approach is a simple principle: It’s not how much you sell (volume and revenue) — it’s how much you keep (profit).

When would you follow a profit-maximising approach?

• Your product or brand offers unique value or differentiation.
• There’s limited capacity or stock — for example, you offer artisan goods or services with limited availability.
• The market supports higher prices, and your customers are less price-sensitive.

In these cases, lowering prices to increase volume makes little sense. The extra effort and costs required to produce and sell more units can quickly erode margins. Instead, businesses focus on charging what the product is truly worth to customers and protecting their margin. That's why pricing for profit is often used in value-based pricing. 

Returning to our chocolate maker, they choose instead to raise prices by 5% to reflect rising costs and the premium nature of their product. The owner estimates the price rise will reduce volume by 10%.  What impact does this strategy have on the bottom line? While the price rise reduces sales volume, the higher price per unit offsets the loss, and if costs remain relatively stable, the overall profit improves.

This approach recognises that:

• Higher contribution margins create financial resilience — every sale contributes more to covering fixed costs and generating profit.
• Not all customers are price-driven — many value quality, brand, convenience or ethics.
• Price signals value — in some markets, higher prices can enhance brand positioning and perceived quality.

Of course, this strategy isn’t without risk. If price sensitivity is underestimated or competitors undercut your offer, you could lose valuable customers. That’s why profit maximising pricing requires careful analysis of customer behaviour, competitor positioning, and market conditions.

Ultimately, profit-maximising pricing is about being strategic. Instead of racing to the bottom, it asks:

• What price will generate the best balance of volume and margin?
• How can we increase profitability without sacrificing too much market share?
• How do we price to reflect the value we create, not just the cost to make?

By shifting the focus from selling more to earning more per sale, profit-maximising pricing builds stronger, more sustainable businesses.

So, how do you predict what will happen to your volume? 

In the examples above, you may have noticed a clear pattern. When prices were cut, sales volumes increased. When prices rose, volumes dropped. Naturally, this raises an important question:

"How do I know how much sales will go up or down when I change prices?"

This is where the concept of price elasticity of demand becomes essential. And while it may sound a little technical, stay with me — understanding this will make pricing decisions much clearer and more predictable.

Price elasticity helps estimate how sensitive your customers are to changes in price. In other words, it gives you a way to predict customer reactions when you increase or decrease your prices.

·        If you raise prices, how many customers might you lose?

·        If you lower prices, how many more might you gain?

Rather than guessing, price elasticity gives you a structured way to estimate the likely outcome.

The formula itself is simple: it’s the percentage change in quantity demanded divided by the percentage change in price. But what really matters is how you interpret the result.

• Elastic (> 1) → Customers are price-sensitive. volume.
• Inelastic (< 1) → Customers are less sensitive.
• Unit elastic (= 1) → Price and demand move proportionally.

If the elasticity is greater than one (what economists call elastic), it means customers are sensitive to price changes. Lowering your price will likely result in a proportionally larger increase in sales volume, while raising it will risk a sharper drop in sales. On the other hand, if elasticity is less than one (inelastic), customers are less sensitive. In this case, a price increase may only cause a small drop in volume, making it a better scenario for protecting or boosting profit margins.

Let’s go back to our chocolate maker to make this more tangible. Suppose the product has a price elasticity of 2. This suggests that for every 1% change in price, you could expect a 2% change in volume in the opposite direction. So, if you decide to lower your price by 10%, it’s reasonable to estimate a 20% increase in sales volume. Likewise, raising your price by 10% would likely result in a 20% drop in sales.

This is exactly how we arrived at the projected volume changes in our earlier examples. Price elasticity turns pricing decisions from vague guesses into informed forecasts.

Of course, in the real world, calculating precise elasticity figures can be challenging. Ideally, you would conduct research or run pricing experiments to see how your customers respond to different price points. However, industry benchmarks and your own observations can offer helpful guidance when precise data isn’t available.

Where to from here? From business strategy to pricing strategy. 

Deciding whether to chase sales growth or profit is only the beginning. Once managers are clear on what they’re aiming for, the next question is how to set prices to achieve that goal. This is where specific pricing strategies come into play — from straightforward approaches like cost-plus pricing to more dynamic methods like penetration pricing, value-based pricing, and premium pricing. Each has its place depending on the product, the market, and the business objective.

In my next blog, we’ll unpack these common pricing strategies, explain when to use them, and show how they align with either revenue-focused or profit-focused goals.