Price management issues, opportunities, and threats fall into three distinct but closely related levels.ġ. The pricing puzzle is more manageable when taken in pieces. Reduced to their essentials, these concepts show companies where their products’ prices erode between invoice price and actual transaction price, and they help companies capture untapped opportunities at that level. Some companies that have identified this problem are handling it by applying two basic concepts: the pocket price waterfall and the pocket price band. Most companies use invoice price as a reporting measure, but the differences between invoice and actual transaction price can mean significant reductions to bottom-line profit. Without realizing it, many managers are leaving significant amounts of money-potential profit-on the table at the transaction level, the point where the product meets the consumer. But while most managers have a handle on the bulk of pricing issues, many overlook a key aspect of this most basic management discipline: transaction price management. Pricing issues are seldom simple and isolated usually they are diverse, intricate, and linked to many aspects of a business.
The messages of Exhibit 1 also apply in reverse: a mere 1 % price decrease for an average company, for instance, would destroy 11.1 % of the company’s operating profit dollars.
But the price lever is a double-edged sword. According to our research, a wide variety of businesses, including those in consumer packaged goods, energy, and banking and financial services, have achieved comparable results.Įven if a company’s managers make the right pricing decisions 90 % of the time, it’s worthwhile to try for 92 %-the payoff is that high. An industrial equipment manufacturer boosted operating profits by 35 % by carefully managing price levels up a modest 3 %. One consumer durable products company increased operating profit dollars by nearly 30 % with a mere 2.5 % improvement in average prices. With such extreme profit leverage, pricing is one function that a company can always improve. Comparison of Profits Levers* *Based on average economics of 2,463 companies in Compustat aggregate Improvements in price typically have three to four times the effect on profitability as proportionate increases in volume.Įxhibit 1. But, as Exhibit 1 shows, a 1 % improvement in price, assuming no loss of volume, increases operating profit by 11.1 %. For a company with average economics, improving unit volume by 1 % yields a 3.3 % increase in operating profit, assuming no decrease in price. Compare, for example, the profit implications of a 1 % increase in volume and a 1 % increase in price. The leverage and payoff of improved pricing are high. Getting the price right is one of the most fundamental and important management functions it should be one of a manager’s first responsibilities, a nuts and bolts kind of job that determines the dollar and cents performance of the company. The result of not managing price performance, however, is far more damaging. Yet many otherwise tough-minded managers shy away from initiatives to improve price for fear that they will alienate or lose customers. The right price can boost profit faster than increasing volume will the wrong price can shrink it just as quickly. This scale is unparalleled - only those product providers who had architected their products for super scale, grounds up will survive,” said Rivi Varghese, CEO, CustomerXPs, which offers real time enterprise fraud management for large banks globally.The fastest and most effective way for a company to realize its maximum profit is to get its pricing right. “When two PSU megabanks merge, the scale is akin to two large countries like the UK and Germany merging. The other challenge is that smaller service providers will need to scale up their own platforms to be able to support the bigger entity that will be created after a merger. And, since most service providers work on a model where companies pay for the services upfront and then bear a charge for maintenance, a reduction in the number of prospective customers will affect revenues, industry executives said. Further, with time, these will get optimised even more,” said Sundar Sundararajan, executive director, i-exceed Technology Solutions, a company that offers a digital banking platform to financial institutions globally.
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“With multiple banks becoming one, there will be synergy on technology spends, in the number of data centres, number of servers, locations, software being used, and other services offered.
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