How to Sustain Profits in a Downturn Using Effective Pricing Strategies
Dramatic volatility in energy and commodity prices, significant turmoil in the financial markets, and a strong downward pressure on product prices are sharply eroding profits of companies across industries. Here, Knowledge Center contributor Tapan Bhatt shares five best practices that will help your company use pricing strategies to protect margins, survive the economic storm and emerge stronger than your competitors as the market recovers.In this current economic climate, cost-reduction strategies that involve reducing work force, curtailing new investments or consolidating operations are the most tried and tested lever for protecting profit margins. However, for most companies today, additional cost-reduction opportunities-without significant negative impact on business performance and customer service-are no longer available. In this challenging environment, companies must turn to the most influential and yet under-leveraged driver of profits: active management of price. A recent study makes clear the power of pricing: a small one percent increase in realized price can deliver up to a 10-percent increase in operating profits. The importance of pricing is further validated by the proven success of pricing investments by leading companies across industries. For example, a leading global manufacturer that invested strategically in pricing achieved substantial margin improvement. The strategic pricing investment included a combination of organizational pricing leadership, revamped pricing processes and the use of pricing software to enforce and support those new processes.
Another recent survey affirms the benefits of pricing initiatives and investments. The survey found that almost half of the respondents achieved a return on their pricing investments in a year or less. It is not uncommon for companies to realize profit improvement of up to one percent of sales (or $10 million in profits for every $1 billion in sales) in less than 6 months from short-term pricing opportunities. In the long term, companies can use pricing strategies to create a platform for ongoing pricing improvement.