Many companies don’t adequately invest in developing expertise in pricing as a strategic core competency, and neglect to implement pricing strategies and systems that are designed specifically to optimize profit.
This weakness persists despite ample data, academic research, and the intuition of most managers that optimizing pricing is more impactful than tightening the supply chain, reducing inventory, or trimming production costs.
According to research by Wharton Research Data Services (WRDS), price is by far the most effective financial lever to increase profitability. Price changes also has the fastest impact, compared with increasing marketing or hiring more salespeople. Most companies base pricing on some measure of cost and apply a mark-up rate or amount, while leveraging discounts to drive volume and capture market share. When competitive pressure is felt, they will match competitive pricing if necessary. These simplistic or passive approaches to pricing leave billions of dollars of profit on the table.
While holding cost structures constant, according to WRDS, a 1% reduction in fixed costs will provide a typical firm a 2.45% increase in profit, a 1% increase in sales volume will increase profit by 3.28%, and cutting variable costs by 1% will result in a 6.52% increase in profit. This is where most companies spend their time, resources and investment; to control and reduce costs and in marketing to increase sales volume. Yet, a 1% increase in price results in 10.29% of increased profit.