The Practical Power of Pricing in Promoting Profit
Personal and concrete reflections by ANDERS REHNBERG
February 15, 2012
The State of Creativity
“
A one per cent Price increase means a 12% Profit improvement”
Price as a lever for increased profits has been well understood by many top-level executives in the industry for a long time but it still amazes me how often I can surprise senior managers by showing scenarios in spread sheets that outline the impact of even modest price movements on their company’s profits.
There is a wide-spread lack of activity and creativity in the area of Price in most companies, even though this is an area where they could ‘carve gold with a small knife’ as we say in my native Sweden.
I have been preaching ‘creative pricing’ (not a relative of ‘creative bookkeeping’) for over 20 years and I cannot really say that the overall understanding of Price in the industry has improved much at operative levels, except in companies I have worked with naturally.
The same company executives who would never turn down a technical challenge to improve their Network Equipment or stream-line their Preventive Maintenance Service will say it is impossible when asked to find a way to increase prices in the Market.
The
creativity goes out the window when confronted with Price.
Real life Story: 15% Price Increase of a Commodity without Volume Loss
When I took over a small (60 people) UK manufacturing operation many years ago, trading in window blinds, I was faced with the immediate problem of depressed pricing. I needed to quickly find a way to improve overall price levels, but with a fairly standard product and 1055 competitors (according to listings in Yellow Pages) it seemed difficult – unless you knew how to apply commercial creativity!
I correctly estimated that my customers (blind shops in the London area in the early 90´s) were less used to metric measurements, seeing that all the price lists and documentation in this industry was done in imperial measurements by tradition , furthermore I specifically noted that the "centimeter" was the least known metric measurement. Therefore I updated all the companies´ pricelists, showing ‘width’, ‘drop’ and ‘price’, in a nice new glossy format; showing all the measurements in centimeters AND increasing prices by 15%!
The change in usage of measurements lead to several complaints from blind shops, no complaints were heard about the increased prices. The public, who was being recommended the blinds by the blind shops were not price-sensitive, therefore the company did not lose any sales due to my price move. Needless to say it did wonders for my profits.
Fear of Failing
As an Applied Physicist by training I was used to being scientifically creative, over the years I have found that this skill can be applied equally well to commercial problems – the same brain cells are being used.
Another aspect of Pricing is the fear of losing volume, “but if we increase our prices then customers will go elsewhere” is a common heard worry. This is notwithstanding the proof that I am able to show, that in most cases the volume loss they would have to suffer would have to be enormous to reduce profits ("you can lose up to 1/3 of your volume when you increase prices by 10%").
On the brink of bankruptcy this this fear can be overcome.
Curious how creativity works in practice: read the case study from this Expert White Paper
Link under Price Management.
