Latest / Scaling Up with Fexingo: How Small Businesses Become Mid-Market Companies / How Mid-Market Firms Build Pricing Power
Transcript
- Lucas: If these conversations have moved your work forward in some small way, consider supporting the show directly. We keep it ad-free so we can get into the weeds on things like this. You can buy me a coffee dot com slash fexingo if today was worth a coffee to you. Luna: Thanks for the support, it really keeps the lights on. Now, let us get back to the hard stuff. Lucas: Let us talk about pricing. Specifically, the moment a mid-market company realizes that volume is no longer going to save their margins. I have been looking at data from the second quarter of twenty twenty-six, and there is a stark divergence between firms that raised prices proactively and those that waited for inflation to force their hand. Luna: The ones who waited usually ended up eating the margin loss while their competitors captured the premium segment. Lucas: Exactly. And the difference is rarely about having a better product. It is about having a better narrative around that product. Take Herman Miller, for instance. During the supply chain disruptions of twenty twenty-two, they did not just raise prices because their freight costs went up. They reframed the entire purchase decision for their B2B clients. Luna: I remember reading about that. They shifted the conversation from unit price to total cost of ownership. Lucas: Right. Most mid-market firms are stuck in what we call cost-plus pricing. They calculate their direct materials, add labor, add overhead, and then slap on a standard markup. It is a backward-looking formula. It tells you what you spent last month, not what the customer values today. Herman Miller showed that when you anchor on reliability and durability, the unit price becomes almost secondary. Luna: So they sold peace of mind instead of furniture. That is a classic psychological pivot. Lucas: Precisely. And here is the concrete detail most people miss. Herman Miller didn't just raise prices across the board. They introduced tiered service levels. The base product stayed stable, but the premium tier included extended warranties and priority logistics. This created an anchor point that made the mid-tier option look like a bargain, even though it was priced higher than before. Luna: That is smart framing. It gives the buyer control over the decision while protecting your average deal size. Lucas: It does. But for smaller mid-market firms, implementing that kind of structural change feels risky. They worry about churn. They think, if I raise my price by ten percent, I will lose half my customers. The data suggests the opposite happens if you communicate correctly. Customers don't leave because of price; they leave because of poor communication about why the price changed. Luna: So the fear is mostly internal? The market is actually more resilient than founders give it credit for. Lucas: The market is very resilient to rational explanations. When a firm explains that their investment in quality control or supply chain redundancy justifies the new rate, buyers accept it. The problem arises when the increase feels arbitrary. That is where trust erodes. We see this in software services too. A CRM provider raising fees because they added new AI features gets zero pushback. Raising fees because their server costs went up triggers a retention war. Luna: One is an upgrade, the other is a pass-through of inefficiency. Buyers can smell the difference instantly. Lucas: They can. And this brings us to the 'pricing power trap.' Many mid-market leaders believe that if they stop discounting, revenue will drop. So they offer a ten percent discount to close the deal, assuming they can make it back later. This habit destroys your anchor. Once a client knows you have room to negotiate, every renewal becomes a battle. You have trained them to wait for the concession. Luna: Yeah, I have seen that with consulting firms. They bid low to get in, then try to upsell later, but the client always remembers the initial discount. Lucas: Exactly. And that creates a downward spiral. To fix this, you need to implement what we call 'value anchoring.' Before you even send the proposal, you must establish the value of the outcome, not the cost of the input. If you are selling cybersecurity, do not sell firewalls. Sell the avoidance of a three million dollar breach. The math changes completely when the denominator is risk, not expense. Luna: So you have to move the metric from dollars spent to dollars saved. That requires a much deeper understanding of the client's P&L. Lucas: It does. And that is why this is a strategic hurdle, not just a sales tactic. Your sales team needs to speak the language of the CFO, not just the operational manager. If your reps are only talking to IT directors about specs, you will never capture pricing power. You need to be talking to the finance team about risk mitigation and efficiency gains. Luna: That shifts the dynamic entirely. It turns a vendor relationship into a partnership. Partnerships are harder to replace than vendors. Lucas: Harder to replace, yes. But also harder to build. This is where many mid-market firms stall. They have great products but weak narratives. They rely on legacy relationships rather than building new value propositions. In the current environment of September twenty twenty-six, where capital is getting tighter, clients are scrutinizing every expense. Weak narratives get cut first. Luna: So pricing power is essentially a proxy for brand strength. If you can't explain your worth, you don't own your market. Lucas: Spot on. And there is one more tactical layer. Dynamic pricing. Not the airline model, but the contract model. Mid-market firms should be moving away from fixed annual contracts toward usage-based or performance-based pricing models. This aligns your success with theirs. If you charge based on output, you remove the friction of upfront cost and tie your revenue to tangible results. Luna: That sounds risky for cash flow though. What if the client underperforms? Lucas: It is risky, which is why it requires strong contractual guardrails. But the upside is immense. You capture more wallet share when the client grows. Fixed contracts cap your upside. Performance models scale with the client. It turns your revenue curve into a mirror of their growth, which is exactly what investors want to see in a mid-market exit scenario. Luna: So it is not just about survival, it is about valuation. Investors pay multiples for predictable, scalable revenue, not stagnant fixed contracts. Lucas: Exactly. We are seeing private equity firms specifically target mid-market companies that have successfully transitioned to recurring, performance-based revenue streams. They see it as de-risked growth. The company has proven it can deliver value continuously, not just once a year. Luna: That is a huge signal. It changes the entire playbook for how founders prepare their companies for sale or expansion. Lucas: It does. And the lesson here is simple. Stop thinking of pricing as a line item. Start thinking of it as the primary lever for strategic positioning. If you are not actively managing your price architecture, someone else is managing it for you—usually by undercutting you. Luna: So the question for listeners is not 'can I afford to raise prices?' but 'can I afford to stay cheap?' Lucas: That is the reframe. Because staying cheap eventually means being irrelevant. You become the commodity option, and commodities are always the first thing cut when budgets tighten. Luna: A powerful reminder that value is defined by the seller, not the buyer, until the buyer agrees otherwise. Lucas: Well said. It is about leading the conversation, not following the market. Who is leading your pricing conversation right now?