I advise companies on their pricing strategies, and I'm surprised how often I hear the same flawed piece of conventional wisdom. Many executives and Wall Street analysts continue to think that a high profit margin signifies good pricing. It's hard not to see that big differential between revenue and costs as a signal that you've got pricing nailed. But if that's right, how do you explain Wal-Mart — with its anemic 3.3% net margin — ranking number 2 in the Fortune 500?

If your profit margin isn't a good gauge of pricing effectiveness, what is? Simple: Just ask, is our profit increasing? Bear with me while I walk through a few scenarios. There's a little arithmetic, but you'll be surprised by what it reveals.

Consider a rose shop with fixed costs of $300 and variable costs of 80 cents per rose sold. At a $2 price, 500 flowers are sold. This results in revenue of $1,000. With costs of $700 [$300 + (500 x $0.80)], profit is $300 and the profit margin is 30%.

Now, consider these scenarios in which the shop lowers its margins, but actually increases its profits:

If