Price Improvements Drive 3X to 4X Higher Profit Than Improvements in Sales Volume
When you can identify segments where you can improve your pricing, you get the benefit of more leverage than any other area of your business. If you compare the profit results of a 1% increase in sales volume and a 1% increase in price, the average company is going to see only a 3.3% increase in operating profit from the increase in volume. But if you can raise prices by 1% you can increase profit by 11.1% according to the Harvard Business Review. That’s about a four times increase on profitability compared to the same increase in volume.
Now the good news is, you don’t have to be a Harvard Ph.D. to figure out why this is true. If you increase your sales volume, you’re going to increase other things associated with your order – you will increase your cost of goods sold, certain operational costs around the order, costs related to pick, pack and ship and more. So the impact on your profit isn’t as high. Don’t get me wrong, you need to increase your share of wallet and lines per order and that drives profitability. But the reason a 1% increase in price is so profitable is that you haven’t done anything else to increase the cost associated with that same order.
You see similar results when you compare improvements in both fixed and variable costs. Distributors spend a lot of time trying to lower the overheads, install warehouse management or logistics software, manage costs in numerous ways, but the profit impact just isn’t as large as it is with price.
Perhaps one of the reasons many executives shy away from price – even though they know it the most powerful and fastest way to improve their profitability – is they think it is too hard or to risky. That might be true if you’re just trying to do it without any science behind the decisions. Unfortunately, you’re making those pricing decisions today anyway. Unless you’re giving your stock away for free, you’re making pricing decisions. If you’re worried about risk with customers, you should be worried about it even more without using real statistical analysis.
Consider another scary fact. If you’re not using epaCUBE, not only are you leaving that potential 11.1% new profit on the table by not analyzing your pricing, you’re potentially destroying many more profit opportunities by not managing your pricing performance.