According to a McKinsey Consulting group study, a one percent price increase drives profitability up by seven percent. A separate Gartner consulting study suggests that a one percent boost in price will increase profits by an average of 11 percent versus just a three percent improvement for every one point of fixed cost reduction and a seven percent boost for every one percent of variable cost reduction. With so much more leverage in pricing, why don’t more companies pay attention?
Certainly, it is popular to have cost reduction programs and lean programs in an effort to drive down costs, but why don’t you see more programs to improve pricing, since there is so much more profit leverage to be found in this area?
One possible explanation for the lack of writing and press about pricing may be that marketers don’t like to brag about price increases because they are often not popular with customers. As a result, they want to avoid the publicity (although publicity in the investment community about positive pricing can certainly help your stock price and the mood of your bankers and investors). Companies may also feel that they don’t have any pricing power because they have failed to differentiate their products or service offerings and are stuck in a commodity bidding situation environment. Another equally likely explanation is that most companies simply are sloppy when it comes to pricing and don’t pay enough attention.
To improve your pricing and significantly improve your profitability, there are a few fairly simple things you can do that don’t require all the heavy lifting associated with improving and differentiating your products or service offerings, or require finding new ways to go to market. Each of these suggestions has to deal with paying more attention to your pricing to maximize your revenue within your existing system or marketplace.
One of the first things you can do to find the low hanging revenue enhancement opportunities is to simply look over your price list, compare it to what your customers are actually paying and look for exceptions. Then ask if there is a legitimate reason for the exceptions and fix all of the pricing where there are not legitimate reasons for the deviation. Most companies are surprised at what a little routine price maintenance will do to restore pricing integrity, improve forecasting and financial forecasting accuracy, and bring more profit to the bottom line.
After reviewing pricing for accuracy, ask yourself and your team what your prices should be, given the market conditions in which you operate. While you may not be able to take a four percent increase across the board, you may be able to take increases of seven to eight percent in some markets and product lines where you have great products, high demand and little competition, and hold the line on pricing in more competitive areas. Managing your mix in this fashion can increase profits significantly while maintaining, or even improving, your competitive position in the marketplace.
Finally, consider how you can increase market knowledge for your sales force by helping them to see how similar customers and services are priced and what the profitability of those accounts is. Add to this knowledge information and notes about the customer’s historical willingness to pay, and your sales people will be able to make better informed decisions regarding pricing that will lead to greater pricing performance and increased profits. It is not uncommon to have several sales reps in your organization who simply have not kept up with market movements or cost increases that are costing you significant profits. Letting sales know you are paying attention to pricing and giving them the cost and profit information they need to make better decisions will pay off many times over.
Taken collectively, these three fairly simple steps might add another five to 10 percent to your bottom line. Since most profitable companies often only generate seven to 15 percent of sales as profit, improving those rates by five to 10 percent is pretty significant. When combined with improved and differentiated product and service offerings, and improved go to market strategies, a doubling of profits is very often attainable.
Scott Francis is president of Topline Development LLC, a strategic marketing consulting group that helps companies determine how they can make the most amount of money with the least amount of resources. To learn more, visit toplinedevelopment.com or contact Scott directly at scott@toplinedevelopment. com.
Note: This article appeared in the August/September 2011 issue of Northwoods Commerce magazine.