Increasing Prices: is just a dream?

Posted on May 31, 2012 in tips and tricks

“Pricing right is the fastest and most effective way for managers to increase profits. Consider the average income statement of an S&P 1500 company: a price rise of 1 percent, if volumes remained stable, would generate an 8 percent increase in operating profits an impact nearly 50 percent greater than that of a 1 percent fall in variable costs such as materials and direct labour and more than three times greater than the impact of a 1 percent increase in volume (we know that the effect on the bottom line of OEE is even stronger).

Unfortunately, the sword of pricing cuts both ways. A decrease of 1 percent in average prices has the opposite effect, bringing down operating profits by that same 8 percent if other factors remain steady. Managers may hope that higher volumes will compensate for revenues lost from lower prices and thereby raise profits, but this rarely happens; to continue our examination of typical S&P 1500 economics, volumes would have to rise by 18.7 percent just to offset the profit impact of a 5 percent price cut. Such demand sensitivity to price cuts is extremely rare. A strategy based on cutting prices to increase volumes and, as a result, to raise profits is generally doomed to failure in almost every market and industry.” (The Power of Pricing, McKinsey Quarterly, 2003)

It is hard not to agree on this but how to gain that 1% or how to avoid to loose that 1% in a very competitive market?

No doubt that Top Management Commitment is a prerequisite. We have many customers working in the Industrial Automation arena and most of them are complaining about price erosion: most, not everyone!

One of the Top Performer of the industrial automation market is for sure Schneider which showed impressive 2011 results:

 

 

 

 

 

 

 

In the same presentation the CEO underlined that these results are the consequence of the execution of the priorities indicated by Top Management for the second semester.

 

 

 

 

 

 

 

The two goals of continuing the organic growth path (but where the real opportunities are in terms of segments (energy efficiency and smart grids) or geography (new economies)) and of increasing prices have been courageously indicated as consistent and not contradicting generating the following remarkable result: