Pricing is … Powerful

Pricing is the most powerful marketing mix variable. A small improvement in pricing will have a huge impact in profitability. It is relatively easy to see how.

Take a company that drops 10% of its revenue to its bottom line. In other words, after all fixed and variable costs are taken into account, after all salaries are paid, the company’s profit is 10% of its total sales. For example, a company with $1M in sales has profits of $100,000.

If this company increases pricing an average of 1% without changing anything else, their revenue would be up 1% to $1,010,000, an increase of $10,000. This $10,000 is all profit so their profit increases from $100,000 to $110,000 –  a 10% increase in profit. In other words, a 1% improvement in pricing can yield a 10% increase in profit.

What percentage of your company’s revenue is profit? If your profit margin is normally 20% of revenue (very rare) then a 1% price improvement increases profit by 5%. If your profit margin is normally only 5%, then this same price improvement can yield a whopping 20% improvement in profit. Wow!

This is not saying you should raise all of your prices 1%. It is very likely you can raise some prices to some customers 5%, 10%, 20% or even more with minimal impact. You only need an average price improvement of 1% to see these effects. Yes, pricing is hard, but it is so powerful. It is worth investing resources to improve it.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

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