Price : The most unexploited profit lever

A few weeks back, the morning business paper solemnly informed me that Amul milk would be dearer by Rs. 2 per litre. The article further noted that this was 2nd such price hike in the last 8 months. That got me thinking as to why many organisations that I have worked with did not take price as seriously as marketing, sales or cost savings.

If handled thoughtfully, effective price management is can be an potent tool for managing corporate profits.

#1. Price change is fastest to implement: Compared to any other profit lever like advertising,  product , packaging or cost savings,  price change is faster to execute. Depending on the size of the business, it can easily take a few months to implement changes in the non price levers. However, price changes can be implemented in matter of weeks. Most of the business effort while making a price change, is be geared towards communication.

#2. Price is the only variable in the marketing mix that brings revenue: All other factors in the marketing mix (e.g. product, promotion, placement) begin with incurring cost and if they are successful, they bring revenue. In contrast price does not suffer from delayed payback.

#3. Price change has a disproportionately higher impact on profits than cost savings: Any cost saving project is likely to bring a lot of anxiety amongst employees and vendors. If not managed well, it can have a negative impact on product quality as well. However, price has a different dynamics altogether. Consider, a situation where a company has following financials.

2017_04_001_A

Now, if you were to bring about 1% favourable change in each of the line items, assuming no other change, the impact of price change is highest on the profits.

2017_04_001_B

If this is all so simple, why isn’t price management the most popular subject in marketing courses? The reason is not hard to imagine. Price change is risky. If it is not managed well, a price increase can cause user backlash and some unexpected competitive reaction. However, if you understand the price elasticity of your products very well along with business environment that you play in, you can avoid the common price increase traps.

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