The biggest profit driver - ‘PRICE’ - be the best at it | Sunday Observer

The biggest profit driver - ‘PRICE’ - be the best at it

25 September, 2022

Intelligently managing price structures and levels is the most important aspect to gain and sustain business success. You get it right and you will thrive. You get it wrong and risk permanent damage to your business.

Think of an investment in pricing as an investment in the future. Excellence in pricing goes far beyond the price of an individual product. It involves business strategy, goals, brand positioning, but also governance, tools and finally all of a company’s processes and culture that ultimately result in the price tag to win in business. It requires experts with an in-depth understanding of customer segments, the products’ value-to-customer, and experience in handling business data to come to the right conclusions.

Price policy, therefore, is one of the most important decisions in management as it affects corporate profitability and market competitiveness. Today with the sharp escalation of cost of inputs, every single business is faced with challenges around margin management for sustainability.

High inflation has depleted the capacity of the consumers’ wallet which is the biggest concern. Interest rates are at an all time high. Operational expenditure has increased by a significant percentage. Business organisations, therefore, are sandwiched in between.

Complex decision

Tough price is seemingly one of the most flexible elements of the marketing mix, which interferes directly and in a short term over profitability and cost effectiveness of a company, hence in an environment of this nature, pricing is the most complex decision which should be left in the hands of experts.

Irony is that if a business does not take a long term view and make short term judgement for survival, there may not be long term for that company. No company will ever reach consensus on pricing as you would always have differing views expressed by different managers. Strategic pricing requires a strong collaboration across all functions. In order to enhance companies’ commercial and financial performance, firstly the cost structure has to be critically analysed in the new supply chain environment to ensure no inefficiencies of the internal operations becomes a burden on the consumer. If not, the consumers will switch to other brands.

Competitors have a huge impact on pricing decisions. The relative market shares of competitors influences whether your own business can set prices independently and lead the market or follow the competitors. At the same time a business cannot ignore the cost of a product when it comes to setting a selling price. In the long-term, a business will fail if it sells for less than cost, or if its gross profit margin is too low to cover the fixed and variable costs of the business.

The state of the market for the product is another key factor.If there is a high demand for the product, but a shortage of supply, then the business can raise the prices without an issue.

The bargaining power of customers in the target market is a key factor. Who are the buyers of the product? Do they have any bargaining power over the price set? Individual consumers have little bargaining power over a supermarket though they can take their custom elsewhere.

However, an industrial customer or a big wholesaler that buys substantial quantities of a product from a business may be able to negotiate lower or special prices. It is critical to understand that prices cannot be set without reference to other elements of the marketing mix. The distribution channels used will affect prices. Different prices might be charged for the same product sold directly to consumers or via intermediaries.

Low price trap

While every consumer loves a good bargain – no matter how rich your consumers are, low prices can often harm how your product is viewed. Instead of getting a product for a great deal, customers often believe that you get what you pay for. Though everyday low-pricing strategies can work for some companies, they are not a great idea for certain businesses.

When you are selling products or services, you want to set prices that achieve a positive business result. But strategic pricing isn’t just about lowering prices; consumer perceptions also play a significant role. And on the other hand if you don’t recover cost escalation you cannot sustain a business. Despite all the hype surrounding great deals, it turns out that cheaper isn’t always better. Low prices can backfire for brands because consumers sometimes see low prices as a sign of a low-quality product. However, the consumers sometimes see low prices as simply good deals.

Price can be the biggest profit lever, but also the most dangerous profit destroyer. Let’s be clear, it is still important to run cost-cutting initiatives on a regular basis and to increase the efficiency of your business. But be consistent and honest with yourself: Invest at least the same amount of energy, time, and money in improving the biggest profit driver “price”.