Luke's post of yesterday regarding price discrimination reminded me of a great article on the importance of pricing to profitability. We all know that Profit = PxQ - CxQ, but too many businesses focus on either Q or C and forget about P. Think about companies you've worked for - I bet they spent more time talking about how they could sell more or about how to reduce costs and not a whole lot of time about how to raise prices.
"Pricing: The Neglected Orphan" (available at http://www.parthenon.com/OurWork/IntellectualCapital/Documents/Parthenon-Pricing%20The%20Neglected%20Orphan_09-2004.pdf) by Roger Brinner, Partner and Chief Economist at The Parthenon Group, should be required reading for all managers and MBA students. He argues that nearly every company has the opportunity to raise effective prices. The profitability impact of price increases is dramatic. Raising price by just one percent flows directly to higher profits. He notes that with an average pre-tax profit margin of 8.6% for an S&P company, revenues would have to increase by 12% to get the same payoff.
The bottom line: don't forget the power of P.
Would be interesting to see this piece brought up to date - my sense being that the world is rather different now than it was in 2004. On the one hand the impact of China's growth on US firms' pricing is surely much increased, on the other the weakness of the dollar is likewise more serious. Today US inflation seems more likely, and so forth. Is there a new oracular pronouncement from the House of Parthenon?
ReplyDeleteMore intriguing, though, are the parallels between the Parthenon model (P) and the Balanced Scorecard (BS). Four dimensions, some inside some outside, attention to customers, etc. Seems pretty much the same - and hey, perhaps it is really part of the Boston view of the world - in quarto partes divisa est ??
For those like myself that have been taught to respect the BS on the grounds that it is widely used by practitioners - to whom this blog declares its linkages - there are unresolved puzzles about precisely why the BS seems so appealing. In principle, the P should be appealing for the same reason.
I think that the real estate world has been taking notice of the power of P. We see commercial properties changing hands (think Blackstone's recent spin-offs of parts of their EOP buy-out) at valuations that assume massive pricing power by landlords. Commercial rent/sq ft is skyrocking as buyers raise rents to justify/finance their recent acquisitions. We will soon see how much P these buyers have.
ReplyDelete