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Why You Should Be Measuring Price Performance

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Managers have an enormous number of measurements at their disposal to help them keep their finger on the pulse of business performance. Think of all the financial ratios and reports that are applied to nearly every aspect of a business operation. There are reports that measure sales, gross margin, operating profit, receivables, payables, quality, production efficiency and more.

But one critical report ­– the price performance report – is often missing. Yet pricing has more potential impact on profitability than any other profit driver. According to research by McKinsey & Company, a 1% improvement in price boosts net income by 11% for the average U.S. corporation. That means an additional $1 million to the bottom line for every $100 million in revenue.

So why are so few firms measuring their price performance? Wouldn’t it help to know whether your pricing is contributing positively or negatively to your profit margins? For many wholesale distributors and manufacturers, pricing can be dynamic, with prices varying for an item on a transaction-by-transaction basis. How do you know if your collective prices are increasing, holding or declining? And how are changes in pricing impacting your profit margins?

Price performance at the highest level is the change in overall price levels across a business. It measures the change in price on a percentage basis. For example, a business with a price performance improvement of 1.5% has seen prices increase overall by this amount and has contributed positively to profit margins. On the other side, a business with price performance of -1.25% has seen prices decline by this amount and has detracted from profit margins.

Measuring price performance is relatively easy, although it takes transactional-level data to execute. Measurement is simply defining the change in price across a time period multiplied by the number of units sold:

Price Performance = (Current Price – Previous Price) x Units Sold

The solution to this equation is the overall change in price-driven revenue. This equation is applied to each item sold in a given time period and summed to arrive at the total business impact.

Take the $100 million company that experiences a -1.5% price performance over a one-year period. Price was responsible for detracting from margin performance by $1.5 million. Margins may still have grown through cost reductions or increased sales, but price did not contribute to the gain.

The old saying “What gets measured gets managed” applies here. If you knew how your pricing was contributing to your financial performance, how would that change the way you manage your prices?

With insight into price performance, you begin to see where you are performing well and where there is room for improvement. What if you knew which items, markets, customers or sales reps were contributing positively to price performance and which ones were detracting from it? With measurements that provide visibility, you can manage more effectively and drive more margin to the bottom line.