The Power of Pricing

Pricing is probably the most under-rated weapon in the marketer’s armoury. Indeed, today, far from being a key element of the marketing mix, pricing decisions are often left to the Finance department. And, companies are losing out as a consequence.

Most companies use a cost-plus approach to pricing; starting with the cost of goods sold, perhaps conducting some comparative competitor price analysis, then adding an arbitrary margin. But this pricing model rarely maximises the value potential. There are other more effective ways to determine a pricing position which can help achieve a price point much closer to the True Economic Value and avoid leaving money on the table. The best businesses are quite rightly focused on profitability, and understand the critical difference between revenue and profit; “revenue is vanity, profit is sanity”, as the saying goes. However, all too often, the short-term method to increase profit is to drive sales through promotion or cut costs. But analysis from the Wharton Business School, based on original research by McKinsey, points to the unexpected Power of Pricing. It shows that if a company reduces its fixed costs by 1%, it can expect an increase in profitability of 2.5% on average. Similarly, if a company increases its sales by 1%, it can expect a 3.3% increase in profitability. A 1% reduction in variable costs yields a 6.5% increase in profitability. But a 1% increase in pricing gives a 10.3% increase in profitability.

The analysis underlines the Power of Pricing, showing that it is by far the most effective lever to increase profit. Pricing should be treated as a key and fundamental element of the marketing mix.

Marketing Means More can help improve the profitability of your business and significantly improve your Return on Marketing Investment.