BUSINESS EXCELLENCE by SURESH PATEL

Author:SURESH PATEL
Language: eng
Format: epub
Publisher: CRC Press

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Passenger cars

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Light trucks

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Medium trucks

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Buses

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Heavy trucks

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Agricultural machines

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PRICING POLICY

Pricing is a double-edged sword.

“Pricing right” is the fastest way for managers to increase profits. A study of the income statements of 1500 S&P companies by McKinsey consultants revealed that a price rise of 1% would generate an 8% increase in operating profits. This impact is 50% more than that of a 1% fall in variable costs such as materials and direct labor. Also, it is three times greater than the impact of a 1% increase in volume.

But the pricing sword cuts both ways. A decrease of 1% in average prices has the opposite effect, bringing down operating profits by that same 8% 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 the examination of typical S&P 1500 economics, volumes would have to rise by 18.7% just to offset the profit impact of a 5% price cut. Such demand sensitivity to price cuts is extremely rare. The moral is: A strategy based on cutting prices to increase volumes and to raise profits is generally doomed to failure in almost every market and industry (McKensey Quarterly November 4, 2015).

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