The Pricing Wake-Up Call

Inflation has forced UK companies to confront a capability that many had neglected for decades: strategic pricing. When input costs were stable, simple cost-plus pricing — adding a fixed margin to costs — was sufficient. The inflationary environment of 2022-2025 revealed this approach to be dangerously inadequate.

Companies that relied on cost-plus pricing found themselves in a destructive cycle: costs rose, prices followed with a lag, margins compressed, and customers defected to competitors who managed the transition more skillfully. McKinsey research shows that a 1% improvement in pricing delivers an 8-11% improvement in operating profit — far more than equivalent improvements in volume or cost.

Value-Based Pricing Principles

The alternative to cost-plus pricing is value-based pricing: setting prices according to the value delivered to customers rather than the cost of production. This requires a fundamentally different mindset and capability set.

Value-based pricing starts with understanding what customers actually value — which may be very different from what the company thinks they value. Systematic customer research, willingness-to-pay analysis, and competitive benchmarking provide the foundation for pricing decisions that reflect market reality rather than internal cost structures.

UK companies that have successfully adopted value-based pricing include Rolls-Royce (with its power-by-the-hour engine servicing model), JCB (which prices equipment based on total cost of ownership rather than purchase price), and numerous software companies that have shifted from perpetual licences to usage-based pricing.

Segmented Pricing Strategies

One-size-fits-all pricing leaves significant value on the table. Different customer segments have different willingness-to-pay, different value drivers, and different competitive alternatives. Segmented pricing — offering different price points for different customer segments or use cases — captures more of the available value.

Airlines and hotels have practised revenue management for decades, but the principles are applicable across sectors. UK B2B companies are increasingly adopting segmented pricing, using customer size, industry, usage patterns, and competitive context to set prices that reflect the specific value delivered to each segment.

Technology enables more sophisticated segmentation than was previously possible. Dynamic pricing, personalised offers, and usage-based models allow companies to align price to value at an individual customer level — though this must be balanced against transparency and fairness considerations.

Communicating Price Increases

In an inflationary environment, price increases are inevitable. How they are communicated and implemented makes the difference between retained and lost customers.

The most effective approach is proactive, transparent communication that explains the reasons for price increases and demonstrates the value the customer continues to receive. Companies that surprise customers with price increases, or that implement them without explanation, consistently experience higher attrition than those that communicate openly.

Timing also matters. Spreading price increases across multiple smaller adjustments is generally better received than infrequent large increases. And offering customers options — such as locking in current prices for an annual commitment — can improve retention while providing revenue visibility.

Building Pricing Capability

Strategic pricing is not a one-off project but an organisational capability that requires sustained investment. UK companies that excel at pricing typically have dedicated pricing functions, invest in pricing analytics and tools, train their sales and account management teams in value-based selling, and maintain rigorous governance over pricing decisions.

For most UK companies, pricing represents the single largest untapped opportunity for profit improvement. The companies that invest in building pricing capability now will capture a disproportionate share of available value as competition intensifies and margins remain under pressure.