Understanding the impact of pricing on profit – An STC Classic

A Classic - '63 Corvette

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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©2012 Sales Horizons, LLC

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About Richard Ruff

For more than 30 years Dr. Richard Ruff and Dr. Janet Spirer - the founders of Sales Horizons - have worked with the Fortune 1000 - such as UPS, Canon USA, Smith & Nephew, Boston Scientific, Owens & Minor, Textron - to design and develop sales training programs. During his career Dick has authored numerous articles related to sales effectiveness and co-authored "Managing Major Sales", a book about sales management, "Parlez-Vous Business" which helps sales people integrate the language of business into the sales process, and "Getting Partnering Right" – a research based work on the best practices for forming strategic selling alliances. Dr. Ruff received his Ph.D. in Organizational Psychology from the University of Tennessee and a B.S. from Rennsselaer Polytechnic Institute.
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One Response to Understanding the impact of pricing on profit – An STC Classic

  1. As usual Dick, you capture the essence of good evidence based selling.
    A one per cent Price increase may, if all else is equal , render an 11% Profit increase.

    The Modern Thinking Salesperson, is responsible for Profit, but usually NOT for Price, which is a dichotomy. Profit, is what we have left after paying all our costs on the Revenue we Generate. So, we have to recall that a NO Sale, still incurs much of the “Costs”, but sadly none of the Income, in fact ‘NO Sale’ generate huge losses!

    Price, Volume and Profits all have to be positive numbers!

    Kaplan reminds us that the “Market”, ultimately, determines our Selling Price,
    and that we should determine our Profits by managing our Costs.
    A lesson not lost on Apple’s I-Phone!

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