Business Magazine

The Most Powerful Profit Lever

Posted on the 27 March 2012 by Alanhargreaves

We need to talk about prices

Price is the most powerful profit lever. The arithmetic is simple. If costs are $9 and you sell for $10, your profit The most powerful profit levermargin is 10%. Raise your price 10% to $11 and your profit doubles to $2.

It’s also the loss lever. Cut that price by 10% and profit disappears.

Price is the quickest thing you can change in the margin equation. Reducing expenses requires careful planning and execution. Prices can be shifted overnight. Want to move idle stock? Put it on sale.

Price is also the most flexible marketing tool. It can be bundled with other offers. It can make a statement about your quality, attract customers or build loyalty.

Smart pricing is critical to real business success.

Surprisingly few firms align their price with the realities of their market or their business. They opt for the simplest price-setting mechanism: cost plus.

Nothing wrong with that if it works. But business is about optimizing returns, not scraping by. Having the right pricing architecture will optimize the value of your business.

This applies to all firms. National suppliers with hundreds of product lines build customer relationships by coupling appropriate pricing with rebates for scale.

At the local coffee shop, a promotion where customers “get every 10th cup free” applies the same principle. BothThe most powerful profit leverfiddle with pricing to build business.

How to approach price.

 

  • Develop a holistic strategy. Put pricing in a whole-of-firm perspective What are you trying to achieve in terms of market position and market share?
  • Focus on value. Examine what problem your product or service solves. What is the value of that solution? How can you improve its appeal or delivery? This is the key to releasing hidden margin and boosting profitability.
  • Be inclusive. Have a pricing team. Get input from finance, sales, marketing and operations. You will be surprised at their contribution. You will end up with a more creative policy backed with buy-in and understanding.
  • Keep it simple. Build a pricing structure that is easy to comprehend and can be adjusted via simple rules that everyone understands.
  • Investigate alternatives. Look at bundling, selling add-ons, staggered payments, preferred customer discounts, or even the actual prices. Something that sells for $4.99 in MacDonald’s says value. Nothing sells for $34.99 in an upscale restaurant. It’ll be on the menu for an even $35 and will scream quality and class. What do your prices say?

The most powerful profit lever 

Smaller businesses often set prices too low. I have rarely seen anyone lose volume from a 5% increase. This suggests you should review prices at least annually. People expect inflation adjustments. Properly managed, they are an opportunity to boost volume. Market them via special promotions and bundled offers.

Don’t hold back from raising prices. Set them at a level that reflects the value you provide. Just make sure you have examined the logic behind it. Make pricing part of a comprehensive strategy that supports your business goals.


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