The Underpricing Problem

The most common tactical mistake operators make is also the most invisible. Most founders set their price too low and never find out what it cost them.

Mark Josephson built two companies most operators have heard of. He ran AOL Local. He took Bitly from a free link-shortening utility into a B2B software business that grew past nine figures of recurring revenue. The moment in his career he most often returns to in conversations with operators is not the exit. It is a meeting his team had about pricing, and the math that proved them wrong.

We were a million dollars a year in recurring revenue, and we more or less picked an easy pricing model and said it starts at a thousand dollars a month. The team told me I was crazy. Fast forward three months later, he was doing $1,500 a month deals, $2,000 a month deals.

The team thought $1,000 was too high. The first deal closed at $1,500. The second at $2,000. The price his team believed would kill the funnel turned out to be the floor, not the ceiling. Josephson now states the principle with no hedge.

Underpricing is probably the biggest problem most founders have. Set your price high. You can always lower it. It's hard to raise it.

Across more than 250 conversations with founders, operators, and investors, the underpricing failure mode shows up more often than almost any other tactical mistake. It is more common than the wrong founder-market fit. It is more common than the failed pivot. It is more common than over-hiring. The reason it stays under-discussed is that it does not announce itself. The founder feels busy. The pipeline looks healthy. The dashboard shows traffic. The math, if anyone bothered to do it cleanly, would not work.

What underpricing actually does is not what operators think it does. The intuition is that lower prices expand the addressable market. The reality is that lower prices expand the unqualified portion of the addressable market while leaving the qualified portion roughly unchanged. The buyer with budget authority and a real problem to solve does not become more interested at a lower price. The buyer without budget authority becomes interested for the first time. The funnel grows. The conversion rate collapses. The sales team spends most of its time on conversations that will never close.

Pricing is not a lever to expand the funnel. Pricing is the filter that determines who gets into the funnel.

This reframe is a hard one for founders to accept because the alternative reads, in the moment, as a kind of recklessness. Setting a higher price feels like turning down customers. Setting a lower price feels like welcoming them. The math runs the other way, but the math is not what operators feel. They feel the empty slots on the calendar. They feel the sales team's discomfort with the asking number. They feel the prospect's hesitation on the call. They lower the price.

On the math.

Josephson states the B2B asymmetry plainly.

It is easier to sell a million dollars worth of software than it is a thousand dollars worth of software.

The line sounds counterintuitive until the mechanism is named. A thousand-dollar deal sits in the discretionary spend of a manager. The buyer has to fight for budget, defend the purchase, justify it against competing line items. The cycle is short, the friction is high, and the deal often dies because nobody felt enough pain to push it through. A million-dollar deal sits with someone who has the authority to commit. The pain is named in the budget cycle. Procurement is a real process, not a cargo-cult version of one. The deal closes because closing the deal is part of someone's job.

What looks like the harder sell is actually the easier sell. The Bitly experience compresses the lesson into one quarter. Three months after the team's pricing argument, the closed deals were running 50 to 100 percent above the floor the team had thought was already too high. The buyers who would have balked at $1,000 were the buyers who were not going to convert anyway. The buyers who did convert were comfortable at $1,500 or $2,000 because the price was not the variable that mattered to them.

The implication for an operator at the pricing decision is uncomfortable. The instinct to be reasonable is the instinct to filter for the wrong customers. Reasonableness is a tax the founder pays so that buyers without authority feel welcome to consume sales cycles. It rarely produces revenue. It reliably produces fatigue.

On the package.

The price is one number. The pricing model is the architecture around the number, and the architecture often does more work than the number itself. Ernesto Mandowsky has been articulating this for years in his work with founders crossing seven figures. His distinction is between what he calls prefix-promise pricing and what most operators default to, which is custom-services pricing.

Custom-services pricing tells the buyer that what they are getting depends on what they ask for. The buyer is negotiating capability. The seller is negotiating scope. The price is whatever the conversation lands on. This is the natural model for a founder selling their own time, and it is also the model that makes scaling impossible. Every sale is a custom build. Every renewal is a renegotiation. Margins erode because the seller cannot say no to the next request without putting the relationship at risk.

Prefix-promise pricing inverts the structure. The package is named, the price is fixed, the outcomes are committed. The buyer is no longer negotiating capability. They are committing to a result. The seller is no longer trading hours for dollars. They are pricing the compounding expertise that produced the package in the first place.

Nathan Young, a fractional chief marketing officer who works across mid-market companies, frames the same point at the executive layer.

If you don't hire a CMO and you only hire an execution team, then you don't have leadership. So really, you're buying my time to save you a lot of money and mistakes.

What the customer pays for is the avoided cost of wrong moves. A pricing model that captures this charges for the avoidance. A model that fails to capture it charges for the time and pretends the math is the same.

On the relationship.

Vladimir Bushin coaches negotiation for senior leaders, and he opens with a definitional point that operators tend to skip past.

Negotiation is not bargaining. The media contributed to that confusion by starting to issue movies about negotiators being hard and hostile and very assertive, which is absolutely not true. It's probably the worst example of negotiation.

The pricing conversation is downstream of this. If pricing is treated as a bargain, the seller is in a defensive posture, ready to discount, treating the price as a number to be defended. If pricing is treated as a frame for value transfer, the seller is in a different posture entirely. The price names what the seller believes the work is worth. The buyer either agrees with the frame or does not. Discounting in this posture is not a tactical concession. It is a signal that the seller does not believe the original frame.

Bushin names what most often kills the relationship at the pricing layer.

The biggest thing that may slow down or even prevent business is disrespect. People need to regard each other and take into account the other person's needs, their emotional state, their interests, their circumstances, their aspirations, their values.

Disrespect at the pricing layer takes a specific form. The seller has not understood what the buyer is trying to accomplish, and prices accordingly. A buyer who is committing six figures of budget to solve a real problem expects a seller who treats the engagement as worth six figures. A founder who underprices to feel safer is signaling that they do not regard the engagement at the level the buyer does. The relationship erodes before it begins.

Steve Walsh, who has invested in 67 companies and watched nine of them through exit, makes a parallel argument from the capital side. The investor case for pricing power is structural, not aesthetic. A company that cannot raise prices is a company without a moat. A company whose customers are price-sensitive is a company with commodity economics. From the investor's seat, pricing power is a leading indicator of company quality. The companies that ship strong margins, raise prices over time without losing customers, and run pricing experiments without flinching are the ones that compound. The companies that flinch at the first price discussion are the ones that get marked down or passed on.

The honest counterpoint.

There is a version of underpricing that is correct. A founder with no product-market fit evidence, no customer reference set, and no way to quantify the outcome they produce should price low. The price in that phase is paying for evidence. It buys reference customers, case studies, and the data that will eventually allow a real pricing decision. This is the loss-leader stage, and it is real.

The mistake is treating the loss-leader stage as a permanent strategy. Most founders who have validated their offer do not raise prices. They raise their hand to acquire the next customer at the same price, on the theory that more volume is better than higher margins. The pricing power they have earned through evidence sits unused on the table. By the time competitors arrive, the pricing precedent has hardened. The company never reaches the margin profile that would have made it acquirable, fundable, or durable.

The counterpoint is that pricing power has to be earned before it can be exercised. The corollary is that once it has been earned, it has to be exercised. Most operators stop at the first half of the rule.

The practical claim.

If the pattern across 250 conversations holds, the operator move at every pricing decision is roughly the same. Set the price that filters for the customer the company actually wants. Accept that this produces a smaller top-of-funnel. Trust that the smaller funnel converts at a higher rate, with shorter cycles, with more durable relationships, and with margins that can sustain the team. Resist the impulse to discount when the calendar is empty. The empty calendar is the filter doing its job.

What operators get wrong about pricing is rarely the math. The math is straightforward, and most founders, asked directly, can produce it. What they get wrong is the conviction. Setting a price that filters for the right customer means accepting that the customers who were never going to convert leave as collateral. It means watching the pipeline metrics look smaller. It means living through the period before the qualified buyers arrive. The operators who hold the line through that period are the operators whose companies eventually price like the businesses they wanted to build.

The Bitly story compresses the entire arc. Josephson held the line at $1,000 against his own team's instinct. The first deal closed at $1,500. The team was wrong, the founder was right, and the company that came out of it was a different kind of company than the one that would have come out of $300 monthly pricing. Most founders do not hold the line. The cost of not holding it does not show up in any single conversation. It shows up over years, in the company that grew slower than it should have, that was less acquirable than it could have been, and that eventually ran out of patience because the math never worked.

The 250 founders I have spoken with suggest the math could have worked from the beginning. What was missing was the conviction to price as if it would.