Do you understand the impact of pricing reductions on profit?

Sales - Profitability and Price

Sales – Profitability and Price

In a Harvard Business Review post, Rafi Mohammed reviewed an interesting McKinsey study on the relationship between price increases and profits.  Just to build a bit of suspense, try the following question – “How much 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.

One moral of the story is – it is worthwhile to have an accurate assessment of the impact of price concessions on profit.  It is important that this knowledge is understood not only by sales management but also by the sales team.   Equally important is whether you have unknowingly sanctioned a dramatic decrease in profits by pushing for 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, on a strategic level what actions could you take to make that happen?  Let’s take a look at a short list.

  • Coach your sales team until they have mastered the fundamentals of selling value.
  • Review the relationship between Marketing and Sales – today the two must be aligned through out the sales cycle.
  • Reexamine the degree to which the sales team is effectively leveraging institutional resources such as: CRM system information, inside sales, engineering/technical support and company success stories.

It is okay in some situation to provide price concessions to win the business.  What is not okay is the failure to sell value first and negotiate second, not understand the impact on profit of price concessions, and the failure to understand how to provide valued concessions other than price that have limited negative impact on profit.

A good test about all this is – ask your sales team to estimate what a 1% price reduction is on the profit from a sale and then sit back and listen to the narrative.  A great follow up question is to ask what else might have been done to win the business.

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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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