Optimizing Operating Costs With Pricing Intelligence
When profit gets tight, most businesses reach for costs. It feels responsible, it is within your control, and it does not require asking a customer for anything. So budgets get trimmed, vendors get squeezed, and the pricing conversation never happens.
That instinct is not wrong, it is just incomplete, and the comparison is more lopsided than most people realize. McKinsey’s analysis across 130 global distributors found that a 1 percent price increase has more impact on EBITDA than a 1 percent uplift in volume, a 1 percent reduction in procurement cost, or a 1 percent cut in SG&A. In that dataset, the 1 percent price move was worth roughly a 22 percent increase in EBITDA margins.
That does not mean ignore costs. It means stop running the two as separate projects. If you want a fast read on where your own pricing sits, take the Pricing Pulse Audit, a short, evidence-based review of your pricing strategy.
Why do cost and price belong in the same conversation?
Because a cost saving you hand straight to customers is not a saving at all.
This is the trap McKinsey identified in that distributor research: companies work hard on back-end margin, squeezing suppliers and rebates, then give the gains away at the front end because their pricing capability never improved. The cost came out, the price came down with it, and margin ended where it started. All that effort, no result.
It runs the other way too. Cutting costs without understanding your cost to serve by customer or product means you often cut the wrong thing. You trim the expense that was supporting your most profitable segment, and your margin gets worse while your spending gets better.
The connection between them is simple: your cost to serve is what tells you whether a price is actually profitable. Without it you are guessing at both ends.
Where costs genuinely are the bigger lever
Being honest about this matters, because costs are not always the weaker play.
Procurement is the clearest case. McKinsey estimates that procurement represents 50 to 80 percent of a company’s total cost base, which is enormous reach. And a dollar taken out of spend drops almost entirely to profit, whereas a dollar of new revenue arrives carrying its own cost to serve.
The AI-assisted results there are real and specific. McKinsey reports AI-guided negotiations delivering 10 to 15 percent savings across vendors, while cutting the analysis and email time negotiating teams spent by up to 90 percent. Separately, its work indicates agentic AI could lift overall procurement efficiency by 25 to 40 percent, and that digitalized indirect procurement solutions enable savings of 15 to 20 percent.
So the honest framing is not “price beats cost.” It is that price is the faster lever per point of effort, and cost is the larger surface area. A business that works only one of them is leaving the other on the table.
What does pricing intelligence actually give you?
Three things, all of which make cost decisions better.
True cost to serve, by segment. Not average cost. What it actually costs to serve this customer or deliver this product, including the support, returns, and exceptions that averages hide. This single number changes which costs you cut.
Price realization visibility. The gap between your list price and what you actually collect after discounts, exceptions, and concessions. That gap is usually wider than teams expect, and closing it requires no cost cutting at all. We covered the detection side in how AI uncovers hidden revenue leaks.
Elasticity by segment. Which customers and products can absorb a price move and which cannot. This is what turns “raise prices” from a blunt instrument into a targeted one.
For how those models work, our guide to how predictive analytics actually forecast prices and demand goes under the hood.
How to connect them, practically
Run one exercise before your next budget cycle.
Rank your customers or products by true contribution margin, not revenue. Most businesses find a meaningful tail that is cash-negative once the real cost to serve is counted. Those are pricing decisions, not cost decisions.
Then, for each cost you are considering cutting, ask which segment it supports and what it does to that segment’s contribution. A cost that supports your highest-margin customers is not overhead, it is investment.
Finally, for anything you plan to reprice, model the cost to serve alongside the price. A 5 percent price increase on a customer whose cost to serve is climbing faster than that is not an improvement.
The takeaway
Cost cutting and pricing are usually run by different people with different meetings and different incentives, which is precisely why the gains leak between them. Price is the higher-leverage move per unit of effort, and procurement has the larger surface area, so the businesses that win work both with one shared number: true cost to serve. Without it you cannot tell a good price from a bad one, or a smart cut from an expensive one.
Want to see where your pricing is quietly giving back your cost savings? Take the free Pricing Pulse Audit, a short, evidence-based read on your pricing strategy.