Psst. I have a secret for you, CEO. How would you like to learn one easy, surefire way to immediately add more than 10 percent in operating profits to your bottom line?
Before you declare this another attempt at “fake news,”– let me assure you, this is a legitimate, real, and practical offer.
Though it requires very little in terms of effort to achieve – it does require a leap of faith, and resolve of focus, that many CEOs have either been reticent, or reluctant, to make.
Stated simply, the secret, as outlined by Mohammad Rafi, pricing guru and author of “The 1% Windfall,” is this: Small, incremental tweaks to pricing of your products and services can lead to outsized returns.
More specifically, Rafi, citing a study of the Global 1200, found that a relatively miniscule 1 percent price increase can power an 11 percent gain in operating profits, on average. Applied to some of your favorite Fortune 200 companies, this 1 percent had even larger profit power, boosting Amazon (40 percent), Aramark (30 percent), Archer Daniels Midland (19 percent), AMR (68 percent), Boeing (19 percent), Ingram Micro (83 percent), and yes, even Wal-Mart (22 percent) well into the double digits. Rafi advocates the importance of selecting the optimal pricing strategy is one based on value versus the common practice of cost plus.
But, what about mid-market companies? Can a simple strategy cultivate such rewards? In short – absolutely – given that most mid-market companies undertake their pricing strategies without capitalizing on the direct link between pricing and profit, while at the same time, allowing discounting practices to fester, unchecked, without keen focus.
A good starting point for executive teams is to undertake an exercise that will reveal the impact of your discounting practices across the customer base. Creating a visual depiction of your discount practices is a great way to do this.
Let’s look at a grid that appears in “Pricing With Confidence,” a book by Reed Holden and Mark Burton, as a basis for our discussion. The task is simple – we want to plot all of your customers’ prevailing pricing on this graph, with price paid/unit on one axis, and the total volume on the other axis. After just a few plots, the visual representation of your customers -- and their pricing -- becomes incredibly revealing (as seen in this sample chart).
Logic would indicate that the largest volume clients should be paying the lowest prices, due to their volume commitments. What is shocking in this example is how few customers actually pay less than 30 cents per pound. That is actually 30 percent less than what the larger customers pay.
There could be several reasons for this: Perhaps it is simply an anomaly; or it could be a screaming sign of discounting gone wild. It also may be that a client was given a significant discount based on a large volume that for some reason didn’t materialize – indicating a different problem, such as a lack of control in quotation execution.
Regardless, this graph tells the story of your discounting, and can provide valuable insights. Get curious about the anomalies here, and you will likely uncover a serious amount of ad hoc discounting. The next step is to use this analysis to taking pricing actions, with surgical precision, on a customer-by-customer basis – adding back in that 1 percent (or more), and driving profitable growth!
A great next step is to put this data into context for your entire organization. Consider digging further by tracking discounting practices by sales rep, and share the information broadly. I’ve often been amazed that two reps in similar geographies, selling the same units to similar size clients, can have such divergent discounting practices.
Also, ensure that this information becomes a fixture at future leadership/executive meetings. A cursory and regular review will help you to identify the most chronic of your discounters, and reveal opportunities to tighten up your discounting policies and procedures – all with positive impact to your bottom line.
You can find Holden and Burton’s complete list of 10 Ways to Stop Leaving Money on the Table here. For more pricing ideas, download our eBook entitled “Smart and Simple Price Adjustments for Higher Profit”