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Practical Help to Grow Your Business
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Is It Worth The Price?
On Top Of Pricing
Research suggests that less than 10% of businesses are on top of pricing. Not just that they think they've got their pricing sorted, but rather that they understand the importance of getting pricing right and have the knowledge, skills and confidence to do so.
Many Executives and Managers think that price setting is outside their remit, outside their company's remit in fact. Their suppliers charge what they charge, their staff costs reflect local pay 'norms', and their margins are 'industry standard', so they feel they have no real control over their prices. Some even delegate price setting to divine intervention!
“Less than 10% of businesses
are on top of pricing”
Think About A Farmer
Think for a moment about a farmer. Does he believe his work is done when the crop is ready to harvest, when the herd is ready for milking, or the lambs are ready to send for slaughter? What is the farmer's biggest capital investment after his land and buildings? Probably his combine harvester or the equipment in his milking parlour.
Of course we all know that farmers know the job's not over until it's over and that harvest time is probably the most important time of the year. So why do apparently 90% of businesses underemphasise the one final step that yields the company its harvest, its profit if you will? Why do 90% of businesses pay minimal attention to their pricing?
“Why do 90% of businesses
pay minimal attention to their
pricing?”
What Controls Profit?
The truth is that within every business one or more human beings has decided what price should be charged for what they sell. The trouble is their pricing models are usually too simplistic.
Profit, obviously, is the difference between revenue and costs, and each of these is made up of two fundamental elements. Revenue equals price multiplied by sales volume, and total costs are the sum of fixed and variable costs.
These represent the only four adjustments available for increasing profits. All other activities can be linked to one of these. A promotional campaign to gain market share is an effort to increase sales volume. Find a cheaper supplier and you lower your variable costs. Negotiate a reduction in your rent, rates and staff costs and your fixed costs go down. Unfortunately these three all tend to receive similar levels of attention, with pricing usually coming a lonely, neglected last.
“Only four adjustments are
available for increasing profits”
The Impact On Profitability
Research on the impact on profitability of an independent change in any one of these factors has shown that, in every area of business, a price change has the greatest effect on profits. The effect of a change in prices has generally one and a half times the effect of a similar change in variable costs. A similar change in sales volume will have only half the effect of a change in variable costs, and a change in fixed costs only two thirds of the effect of a change in sales volume.
From these generalisations, one might say that any business should devote 10% of its available effort to fixed costs, 15% to sales volume, 30% to variable costs and 45% of its available effort to getting its pricing right!
If there was a way of getting your pricing right that also raised your sales volumes, it would be worth devoting 60% of your effort to mastering and implementing it, wouldn't it?
“Any business should devote
45% of its effort to getting
its pricing right!”
Price changes are the easiest, quickest and most effective changes to make, but they are also the most visible to the outside world, and potentially the most risky. But this doesn't mean they shouldn't be made, or that they have to be tentative. It just means that changes to your prices must be made with thought, knowledge and understanding, and with confidence, because the promise of increased profit strongly outweighs the risk.
 
Copyright ©2011 David Winch
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