In an extremely competitive and dynamic economic climate, managers across all industries must make decisions on where to invest resources to protect and, ideally, increase profit every day. One-percent improvements to certain components of your business—higher pricing, increased sales volume, decreased costs—all impact your profit margins.
However, not all improvements are the same. A 1% improvement in one area can typically impact a company’s profit by much more than 1%.
But just how much more? And which types of changes typically have the largest impact?
These are the questions a study from the Wharton School at the University of Pennsylvania sought to answer—and its findings might surprise you.
Wharton Report on What a 1% Change Does for Your Business
In a recent report from Wharton, analysts compared how a 1% improvement in a company’s sales volume, total costs and pricing structure impacted its profits. According to the report, making a 1% improvement enhanced a typical company’s bottom line by the following amounts:
- Volume: 3.6%
- Cost: 8.7%
- Price: 12.3%
In other words, making just a slight improvement to the way that your business prices its products can have the most impactful results. A 1% optimization of the pricing structure is as beneficial as similar increases for cost and volume combined.
Why Pricing Matters So Much
Given that so much attention is paid to increasing sales volume and decreasing costs, the conclusion reached by this analysis might come as a bit of a surprise.
Pricing is often the key driver for decision-making by buyers. Increasing price transparency resulting from the shifting of more and more B2B sales to ecommerce results in information asymmetry between buyers and sellers. Procurement teams are armed with data and technology and often weaponize them both to drive down price. Although price happens to be the thing that manufacturers should work to protect the most because of its impact on profit, it is often the first thing that is reduced to protect market share and meet revenue goals.
Pricing is a critical business process at a company that deserves more time and attention than an annual or quarterly update using Excel spreadsheets and a markup over cost.
Sellers will see immense ROI when using sales, customer and competitive data, data science, and technology to update and optimize pricing because price improvements compound to improve profitability for the firm.
How to Improve Your Current Pricing Challenges
Clearly, modifying price will often be the most effective lever for increasing profit. Finding better pricing practices and automating them is especially important in an increasingly disrupted and digital era. The question that remains: How can your business most effectively improve the way it prices its products?
Luckily, there are many accessible solutions that can enhance pricing models for almost any business. With the PROPHET pricing platform, companies can automatically generate pricing, sales and revenue analytics that can help them find the exact prices they should be selling their products and establish discount policies that drive or throttle demand to maximize profit.
Prices are something that all businesses should consider updating as often as they possibly can. And data is the foundation of all optimized pricing models. Once activated, an efficient pricing platform like PROPHET can deliver deeper insights, increase visibility and help make it possible for both small and large enterprises to establish an edge over their competitors.