Price Performance and the Profit Equation

Nothing has more impact on profit margins than pricing actions. Yet, most companies don’t measure price performance and how it impacts margins. Price performance is the difference in prices across items sold multiplied by the number of units sold in a given time period. So, an item that increased in price by $1.00 and had sales of 1,000 units equates to $1,000 in positive price performance.

We typically think of this gain in price as falling straight to the bottom line. After all, no additional expenses would be extracted from the incremental price gain other than sales commissions. This is what makes strategic pricing so powerful.

However, in reality not all of the price gain hits the bottom line. Consider the cost factor. Costs rise and take a bite out of profit margins and need to be factored into margin calculations. And, it is possible to see a rise in dollar profit margins and at the same time see a drop in percentage gross margins or operating profit.

Don’t assume that you have an increase in margin percent when margin dollars improve. Use strategic pricing analytics to go through the calculations and understand the dynamics of price, volume, cost and margins on a dollar and percentage basis. You may be surprised at what you find.