Strength in price setting is your profit driver number one

Everybody knows, B2B pricing analytics represents one of the most critical levers to boost earnings. Still, this reality is a sometimes-overlooked fact in Business-to-Business (B2B).

However, getting B2B pricing right can represent both financial success and substantial competitive advantage. Pricing is not only a driving factor in for-profits, but it also impacts how customers and markets perceive brands.

Relatively small price increases can have a dramatic effect on the profits of any company. A five-percentage points improvement in pricing on an average business could drive profits up by 50 %. In comparison, the same development on variable cost units, sales volume or fixed cost would change earnings by 30, 20 and 15 % respectively. Companies should work on all of them, yet getting the pricing right is the one with higher leverage.

Improving price strategy does not mean setting for all products same increments or prices. Product portfolios in B2B require in-depth pricing analytics. Also, only pricing analytics software can mine through an increasing amount of sales data and find the right pricing opportunities.

Price is nothing – Pricing is everything.

Hermann Simon founded the consultancy firm Simon-Kucher & Partners in Germany in 1985, together with two of his doctoral students. Many executives consider Hermann Simon to be one of the most influential management thinkers after Peter Drucker.

Simon uses a (now-quite-popular) example on his presentations.

Imagine there is a fictional manufacturer “Powerstar” offering a specific electric tool for € 100. It cost Powerstar 60 € to produce each unit. The company has fixed costs of € 30 Million (equipment, plant and other expenses independent of any business activity) and sells one million units of the tool per year.

Using the example above, Simon infers that Powerstar makes € 10 Million in profits out of € 100 Million in revenue.

Revenue is the product of price and volume. Profit is the difference between revenue and cost, including fixed costs.

In this example, the business has only three profit drivers: price, volume or costs (fixed or variable). At this point in his presentation, Mr Simon asks: what is better for profit? A 5 % rise in sales volume or a 5 % price increase (everything else unchanged)?

Comparing profit drivers – How relevant is your pricing policy?

As you can deduce, everyone knows where Dr Simon is going. Not in vain he titled one of his books “Confessions of the Pricing Man”.

If all things are equal, the price is the most effective profit driver. It can generate massive amounts of profits or extinguish margins.

Small rises in price can have a dramatic effect on profits. Using the same assumptions for “Powerstar”, we can calculate that a 5% improvement in pricing will drive profits up by 50 %.

The same increment on sales volume or reduction on fixed cost would change earnings by 30 and 15 % respectively.

Shortly said: improving pricing is the most effective (and fastest) way for sales executives to increase profits.

There are numerous examples of the impact of pricing on profits. Consider now the average income statement of an S&P 1500 company. In such cases, a 1 per cent price rise would generate an 8 per cent increase in operating profits, ceteris paribus.

This impact is more than three times the impact of a 1 per cent increase in sales volume. It is also 50 per cent larger than what a 1 per cent fall in variable costs such as direct labour and materials represents.

However, attractive pricing can be, it is still one of the most elusive strategies to implement for B2B business quickly.

Pricing Analytics: advancing one percentage point at a time.

Let’s not be naïve. Big corporations cannot just “increase prices”, no. They should analyse where price increases can make sense. They must produce price differentiation strategies. They finally need to support their sales team to enforce their pricing strategies.

Therefore, when we talk about price increments, we are not talking about raising prices across the whole product portfolio and customer base.

The most effective path to implementing a winning pricing strategy is to set prices right for one transaction and one customer at a time. This method helps a company to capture a higher pricing rate. Moreover, using such a targeted approach, companies can always find room for price increases or at least price stability.

How can a company control and optimise pricing management across hundreds of customers and thousands of transactions? Using pricing analytics software.

With pricing analytics software, sales managers and key account managers can easily compare pricing strategies and consistently execute a company’s pricing policy. They quickly identify non-optimal prices and prevent different pricing strategies from conflicting in the long term.

Strength in price setting is your profit driver number one – Summary.

Setting price right has a more significant impact on profits than increasing sales volumes or reducing costs. B2B companies can nowadays find the optimal price levels across thousands of sales transactions using pricing analytics software.

Pricing Analytics can, therefore, have a remarkable effect on business earnings. A 5 % improvement in pricing can drive profits up by 50 % on an average business. The same improvement on fixed costs, variable costs or sales volume would change earnings by 15, 20 and 30 % respectively.

Improving a price strategy means setting an optimal price for each customer and product. This kind of in-depth analysis requires advanced pricing analytics. Schedule your call today to see how our software can support your B2B pricing strategy.

I WANT TO IMPROVE MY PRICING STRATEGY TODAY
 

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Further Read:

Hermann Simon. Confessions of the Pricing Man – How Price Affects Everything.

Michael V. Marn, Eric V. Roegner, and Craig C. Zawada. The power of pricing. McKinsey Quarterly February 2003

Douglas Wick. Price Is the Most Effective Profit Driver .

How to Boost Profits through Power Pricing. Presentación Prof. Dr. Dr. h.c. Hermann Simon.

Wie der Preis als Gewinntreiber wirkt – Springer Fachmedien Wiesbaden GmbH (In German)