Friday, July 29, 2016

REPOST: The Power of P

Originally from Friday, July 20, 2007

 The Power of P 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" 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.

1 comment:

  1. That is absolutely right. Companies are missing the strategy to raise the price effectively for their products and services to achieve a high profit. Instead, most of them choose cost cutting tools and aim that on their skilled, very well experienced, and knowledge employees in order to achieve high profit. By laying off their valuable assets/employees, they probably enjoy short term profit, but not aware of future losses. This is very common in consolidated and merged companies. I have witnessed some of these companies which eventually shut down some of their branches to survive.
    Pricing strategy is very essential to the businesses; it affect company’s financial position directly and immediately; therefore, it needs special attention. Other than quantity and costs, there are some other factors, including demand curve and price elasticity impact pricing strategy. Demand curve and elasticity point of a product will give the information regarding how far a company can raise the price before it hurts the business.
    Also, decision analysis is a very good practical tool that can estimate the range that price can be increased without having negative impact on the financial performance of the business. Today, Business is very complicated, especially for those that are gigantic. I think beside R & D department, companies should have Pricing department and hire experts to extract right price to their right products and services.