In a recent Harvard Business Review post Rafi Mohammed reported on an interesting McKinsey study on the relationship between price increases and profits. Just to build a bit of suspense mentally answer the following question – “How must would a 1% price increase boost your profits?”
In the study McKinsey worked with the Global 1200. They found that a 1% price increase – if the demand remained constant – would result on average in an 11% increase in profits. Not bad. Think how many more units those companies and yours would need to sell to achieve an 11% increase in profits at your present pricing.
The overall moral of the story is – it is worthwhile to have an accurate assessment of the impact of price increases and price concessions on profit. For example, have you unknowingly sanctioned the dramatic decrease in profits by driving revenue gains by permitting your sales team to negotiate price reductions?
The key to the McKinsey study was of course – “if demand remained constant.” So, what on some actions for making that happen? Let’s take a look.
- Get serious about training your sales team to sell value.
- Help the sales team develop an understanding of the competitor’s products and pricing structure.
- Reexamine the sales team’s compensation structure and make sure it is align with selling profit.
- Review with Marketing the merit of offering basic and premium versions of your products.
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