Locate High Potential Ideas to Create More Profitable Sales from Adjusting Prices

Most companies set prices to increase profits believing that selling volumes will change little. In either price-elastic markets or where marginal costs are low, that is a mistake.

Further, many companies look only at their own prices rather than what it costs a customer or end user to acquire and employ the offering. While not every offering can be vastly more attractive at a lower total cost to the customer or end user, many will. Companies need to vastly increase their testing to identify opportunities to expand volume profitably through changed pricing structures.

With a pen you can change your profits by adjusting your prices. That's a lot easier to do than finding and implementing a lot of subtle value improvements at the same price.

Do you know what price adjustments you should make? A spreadsheet can tell you the profit impact . . . if you know what the volume effects can be. But you know that most of your volume estimates will be way off the mark.

To overcome those potentially expensive errors, you need to test new prices first. But you already test prices. What's different from what you have been doing if you are to create an improved business model?

You now sell a product at one dollar a unit. You want use price to increase your profits from this product. Normally, you would test a slightly higher price in one geographic market to see how it goes. That price might be $1.05. Your average cost is $0.80 for the product.

If the sales stay about even with what you expect, you will probably make that price increase in all territories. That apparently profitable change in price could be a major missed opportunity, but you'll never know it.

Consider with me an example to help illustrate other ways to think about changing prices.

Let's consider an alternative that you probably didn't test. Because it would only cost you $0.25 (the marginal cost of the product) to sell more of this product, you decide to sell it at $0.80 instead. If the volume you sell increases by at least 50 percent, you make more money.

If you don't have to invest in more equipment or working capital and you are the low cost producer, this is a better deal because competitors will have a harder time making inroads against you in the future and you have just increased your relative cost advantage. If you are a high cost producer, all that may happen is that you will set off a price war that you will lose.

The competitors may ignore your test, which will make the test results misleading. But they will not ignore a full roll-out.

Now, consider a second alternative that you probably didn't test. The product's price stays at $1.00 for the volume levels purchased in the last year, but for increased purchases above that level the price is $0.70. If total volume increases by at least 15 percent, you make more money. Again, if you don't have to add assets to make this money and you are the low-cost producer, you are ahead. The price war risk is much less if you are not the low cost producer.