Warren Buffett has said, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”
While I agree with Mr. Buffett that pricing power makes for a strong business, not every company can raise prices by 10%, or needs to. According to McKinsey & Company, a simple 1% price improvement realization will yield an 11% boost in income for the average company.
Yet, most every manufacturer and distributor that we engage with has the opportunity for price improvement somewhere in its business. The key is identifying exactly where you can realize price improvement without losing customers.
Using invoice pricing data is a good starting point. In a price analysis, we use proprietary pricing analytics to review historical line item data and identify under-optimized price transactions. These are relatively easy to find by comparing how prices for a specific product vary across similar customers in individual markets.
Another source of improved price realization lies in identifying price leaks and sealing them. These are the areas where profits leak through weak pricing policies around freight, expedited shipping, handling charges, payment terms and similar leakage points.
Any business that can raise prices without losing customers has pricing power. Most businesses have more pricing power than they realize. The key is being selective about where to apply price increases and how to implement the increase.
Do you have any pricing power? Call a Price Point Partners pricing expert to find out at 330-342-0923.