Pricing’s Impact on Profitability
Distributors have spent many years implementing both technology and processes to reduce the cost of doing business. Often the goal is to improve productivity, customer service or create a competitive advantage. Until recently, distributors lacked the software and systems to implement their own pricing optimization program. While pricing, costs and rebates are the most significant variables affecting business profitability, relatively less attention has been paid to automating a process that has the largest impact to the bottom line.
The fastest and most effective way for a company to boost profits is to get their pricing right. Just how big of an impact can improved pricing have on profitability? According to Michael Marn and Robert Rosiello writing in the Harvard Business Review, pricing represents one of the most powerful—and often overlooked—opportunities for new profit. They point out that improvements in price have three to four times the effect on profitability compared to proportional improvements in sales volume. A 1% improvement in price translates into an 11.1% improvement in operating profit, while similar improvements in costs and volume have less impact.
Marn, Michael V., and Robert L. Rosiello. “Managing Price, Gaining Profit.” Harvard Business Review 70, no. 5 (September 1992): 84-94.