Latest / Scaling Up with Fexingo: How Small Businesses Become Mid-Market Companies / The Pricing Power Trap in Mid-Market Firms
Transcript
- Lucas: There is a specific kind of panic that sets in when a mid-market company hits twenty million in annual revenue and then just... stops moving. You have the sales team working harder, you have the product quality holding up, but the top line flattens out completely. It feels like you’ve hit a glass ceiling, and most founders assume they need to hire more salespeople or launch a new marketing campaign to break through. Luna: But usually, the problem isn’t volume. It’s that the price you’re charging doesn’t reflect the actual value you’re delivering anymore. The gap between what customers pay and what the company is worth widens as you scale. Lucas: Exactly. And the trap is almost always rooted in how the pricing was set at five million dollars. Back then, cost-plus pricing made sense. You take your manufacturing or procurement costs, add a standard margin, and submit the quote. It’s fast, it’s defensible, and it keeps the admin team from drowning in complex calculations. But once you cross ten million, that simplicity becomes a liability because it ignores what the customer actually cares about. Luna: Right. Because at that scale, your customers aren’t buying components or services; they’re buying risk reduction, speed, or integration. Those are things cost-plus never captures. Lucas: Let’s look at a concrete example from last quarter. There was an industrial component distributor we tracked closely. They were stuck at twenty-four million for three straight years. Their gross margins were hovering around eighteen percent, which is decent for distribution but terrible for growth capitalization. They tried everything—new CRM tools, aggressive outbound campaigns, even hiring a VP of Sales from a much larger competitor. Nothing moved the needle until they looked at their own price lists. Luna: So they realized their prices were essentially frozen in time, anchored to competitors who were also stagnant? Lucas: That was part of it. But the bigger issue was that they had allowed their largest accounts to negotiate discounts that eroded their base price by nearly fifteen percent over five years. These weren’t bad deals in isolation. Each discount felt justified because the client was growing. But collectively, those fifteen percent leaks across fifty key accounts meant they were leaving roughly four million dollars on the table every year without realizing it. Luna: That is a massive blind spot. Most finance teams see the revenue number and think the deal is good because it closed. They don’t see the margin erosion until the end-of-year audit. Lucas: Precisely. And fixing this requires a shift from cost-plus to value-based pricing, which sounds like buzzword soup until you actually do it. The first step is identifying which products or services have high switching costs for the client. If a manufacturer has retooled their assembly line to use your specific connector or software module, they aren’t going to switch vendors over a two percent price difference. That stickiness is where you find your pricing power. Luna: But asking for a price increase on a relationship that’s been stable for a decade feels risky. How do you frame that without losing the client? Lucas: You don’t frame it as a price increase. You frame it as a service recalibration. The industrial distributor I mentioned didn’t just send a letter saying prices are going up. They bundled their core commodity items with a new predictive maintenance analytics tool that their engineering team had built. Suddenly, the conversation wasn’t about the price of steel or plastic components. It was about the downtime they were avoiding. The average contract value jumped by twenty-two percent in the first six months after the rollout. Luna: That’s clever because it changes the metric of comparison. They stopped comparing themselves to other distributors and started comparing themselves to internal operational efficiency. Lucas: It forces the client to evaluate the ROI of your entire solution, not just the unit price. But here is where mid-market firms often stumble. They raise prices too aggressively or all at once, which triggers churn among their most price-sensitive segments. The trick is tiered implementation. You identify your top twenty percent of clients by lifetime value and introduce the new value-anchored pricing there first. For the smaller, transactional accounts, you can keep a simplified, higher-base price structure that discourages low-margin work. Luna: So you’re effectively pruning the bottom of your business while upgrading the top? That’s a classic profitability play, but it requires really honest data about which clients are actually profitable versus just busy. Lucas: Yes, and that data collection is painful. Many mid-market companies don’t have granular profitability data down to the individual SKU or service ticket. They rely on averages. To execute a value-based pricing shift, you need to know exactly how much margin each account generates after support costs, logistics, and payment terms. Without that visibility, you’re guessing whether a price hike will hurt or help. Luna: I imagine the sales team pushes back hard on this. They’re used to being the ones who close deals, and now they’re being asked to defend higher prices with complex ROI arguments instead of just handing out discounts. Lucas: It’s a cultural shock. In many mid-market firms, the sales commission structure is tied purely to revenue booked, not margin preserved. So if a rep closes a huge deal at a low margin, they get paid the same as someone who closes a smaller deal at high margin. Fixing the pricing model requires fixing the compensation model simultaneously. Otherwise, your best sellers will sabotage the new pricing strategy just to keep their quotas easy. Luna: So you align incentives. Reps get rewarded for margin retention and successful upsells of the value-added services, not just raw top-line volume. Lucas: Exactly. And it changes the skill set required for the role. You stop hiring hunters who thrive on quick transactions and start looking for consultative sellers who can sit in a room with a CFO and explain why a twelve percent price increase saves them two hundred thousand in downtime annually. That is a fundamentally different profile, and it often means hiring outside the industry rather than promoting from within. Luna: Which brings us to the timing. If you’re sitting at twenty million and feeling that stagnation, when is the right moment to initiate this pivot? Do you wait for a natural contract renewal cycle? Lucas: You never wait for the perfect moment because it doesn’t exist. But you do avoid doing it during a crisis. If your supply chain is broken or your cash flow is tight, raising prices looks like desperation. The sweet spot is when you have a product or service improvement ready to launch. You pair the announcement with the enhancement. It gives the client a tangible reason to accept the new pricing structure. It’s not just 'we want more money'; it’s 'we are investing in your success, and the price reflects that investment.' Luna: It shifts the narrative from extraction to partnership. Which is exactly what mid-market companies should be aiming for as they compete against giants. Lucas: Right. Giants have scale, but they lack agility. By anchoring your price to value and customization, you leverage the very thing that makes you attractive: your ability to adapt quickly to specific client needs. The pricing model becomes the proof point of that agility. Luna: If today was actually useful to you, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Lucas: Yeah, if these conversations have moved your work forward in some small way, consider that link. It helps us keep digging into these structural problems without needing advertisers to dictate the topics. Luna: Thanks for keeping the show running. Let’s go back to the implementation challenge, because even with the right pricing model, execution is rarely smooth. Lucas: One of the biggest hurdles is internal communication. Often, the finance team designs the new pricing model, but the operations and sales teams are left out of the loop until the day it launches. When that happens, frontline staff aren’t equipped to answer basic questions, let alone handle objections. You end up with confused customers and frustrated employees. Luna: So the rollout needs to be treated like a product launch internally. Train the reps, script the tough conversations, and give them the data sheets to back up their new pricing stance. Lucas: Absolutely. You need a playbook. Not just a spreadsheet of new prices, but a guide that explains the 'why' behind every change. When a salesperson can confidently say, 'Our price is higher because our lead time is half of our competitor’s,' that is a closing argument, not a negotiation weakness. Luna: It turns the price objection into a feature highlight. That’s a powerful reframing technique that takes practice, though. Lucas: It does. And it requires leadership to enforce it. If a sales manager caves and gives a discount to save a deal, it undermines the entire strategic shift. The founders and C-suite need to be willing to lose some short-term revenue to protect the long-term margin structure. It’s a hard discipline to maintain. Luna: Especially when you’re under pressure to hit quarterly targets. It’s easier to discount than to educate. Lucas: Always. But education scales. Discounts decay. If you build a reputation for value-based pricing, you attract better clients who respect that framework and less likely to haggle over pennies. You filter for quality over quantity. Luna: So the ultimate goal isn’t just higher margins on existing deals, but attracting a fundamentally different type of customer relationship? Lucas: Yes. You move from a commodity vendor to a strategic partner. And that is the only sustainable path past the twenty-million-dollar plateau. Once you make that shift, the growth doesn’t feel like grinding harder; it feels like rising with the market. Luna: It’s a reminder that sometimes the hardest thing to scale isn’t the product, but the perception of its worth. Lucas: Exactly. And that perception is built one priced at value conversation at a time. The question for any leader listening is whether they are currently selling their costs or their outcomes.