Pricing that Drives Profits – How one change increases profits by 11%
Did you know that the fastest way to gain profits is to raise pricing?
In fact, just a 1% increase in a company’s pricing can drive an 11% increase in profitability.
According to Harvard Business Review:
“Compare, for example, the profit implications of a 1% increase in volume and a 1% increase in price. For a company with average economics, improving unit volume by 1% yields a 3.3% increase in operating profit, assuming no decrease in price.
But, a 1% improvement in price, assuming no loss of volume, increases operating profit by 11.1%.
Improvements in price typically have three to four times the effect on profitability as proportionate increases in volume.”
So, while most sales managers and executives are focused on driving higher and more recurring revenues with market expansionary efforts (that often require additional capital and time to unlock), the simplest and often most expeditious way to drive profitable results, is to raise pricing (marginally).
“With such extreme profit leverage, pricing is one function that a company can always improve. One consumer durable products company increased operating profit dollars by nearly 30% with a mere 2.5% improvement in average prices. An industrial equipment manufacturer boosted operating profits by 35% by carefully managing price levels up a modest 3%. According to our research, a wide variety of businesses, including those in consumer packaged goods, energy, and banking and financial services, have achieved comparable results.”
A lot of founders I consult with create enormous value for their clients vis-a-vis their platforms, products, and services. However, especially for first-time founders, they often steer towards underpricing their product for fear of out-pricing it in the market, thus resulting in slim gross margins and a lack of net profits. For those situations, it’s often better to debut higher, and then later lower, than price too low and attempt to raise too much, too quickly.
If your company has held its pricing for a long time and is struggling to grow or is seeking a way to raise net profits, I would strongly consider implementing marginally higher prices, using the 1%-3% rule-of-thumb as outlined above, and see what net results transpire. I think you will be pleasantly surprised.