The Simplicity of 1%
We recently provided a strategic pricing training program for a $400 million manufacturing company. This company had already embraced the concept of pricing leverage and was searching for ways to execute price improvements.
During our training we discussed the power of 1%. That is, how an improvement of just 1% in price revenue could impact the financial results of any company. In the case of this client, a 1% price improvement would result in a margin lift of $4 million or nearly 8% of current income.
Further, being a publicly held company with a price-earnings (P/E) ratio of nearly 20, market capitalization would rise $75 million. These are powerful numbers and the management team of this company understands the power and the prize in leveraging price.
While strategic pricing management can be complex with a myriad of data, systems, analyses and people to make it all work, it doesn’t have to be that way to get started. Selectively applying price improvement where pricing is less sensitive can get the ball rolling. Think about those small customers who can support a 2% or 3% gain.
Our subject client decided to add just 1% to every quote going forward. As time went on, confidence grew in their ability to get the 1% target and before long it became 2% and 3%.
At year’s end, the controller was baffled by the rise in profit margins in comparison to the previous year. The management team explained the initiative to add just 1% in price improvement.
Strategic pricing management doesn’t need to be complex to get started. While our recommendations as a pricing consulting firm are typically more sophisticated than a simple 1% price lift, you may find this easy first step generates positive results for your company.
How much would your profit margins improve with a simple 1% price hike? Use our Profit Improvement Calculator to help to find the answer.