For a company, defining its price positioning is a fundamental element in guaranteeing current and future profitability. Price is the figure that sums up the value that the customer perceives, recognizes and is willing to pay for a given product or service.
As confirmed by Warren Buffet, an American entrepreneur and economist, one of the most significant figures in the history of finance, a company must be able to control its price: “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business”.
Translating this statement into numbers, it is easy to understand how, unlike other levers available to top management, the price has a significant and direct impact on margin.
Price: the impact on profits
For a medium-sized company, volume growth of 1% produces a 3.3% increase in operating profit, assuming there is no decrease in price. But, as the figure below shows, a 1% improvement in price, assuming no change in volume, leads to an 11.1% increase in operating profit. Price increases typically have three to four times the effect on profitability as a similar volume increase.
Such a direct impact on profitability, however, also has a downside: failure to manage price, or mismanagement of price, can have immediate, highly negative effects on a company’s business performance.
The definition of the (right) price is a delicate process, which requires a continuous action of analysis, evaluation and implementation and which requires punctual management to be improved and generate positive returns.The current context, highly competitive and highly changeable, makes it vital to define a precise pricing strategy, governed by top management and as much as possible based on the real value of the product or service on the market at that particular time.
Pricing: the strategic involvement of top management
For this to happen, it is necessary for pricing to become a topic of discussion for management along with all the other classic performance indicators, starting with deviations in turnover from targets. Quantitative analysis of the impact of pricing on indicators such as turnover and margins allows top management to understand in depth the correlations between the factors governed and to define the most appropriate actions to achieve the goals set.
For this to happen, an evolution in management sensitivity is required, resulting in a shift from a sales orientation to a margin orientation.The tension applied to achieve turnover targets frequently causes strong price pressure and, consequently, on the profitability generated.
Pricing and C-level, the advantages
Companies that have chosen to have a C-level define their pricing strategy and lead their pricing team have gained a significant advantage over their competitors. An analysis conducted by Simon Kucher & Partners, a leading pricing consulting firm, shows:
- Pricing power, and thus the ability to raise prices without losing volume to competitors, was 35 per cent higher;
- Success rate in adopting price increases grow by 18%;
- EBITDA increased by 30%.
To make this change happen, the direct involvement of management is crucial. It is up to them to decide to implement a process that starts with the definition of a pricing strategy and converges in a management system based on tools that enable the optimization of the pricing process. The new technologies become, therefore, a determining and indispensable element to manage pricing involving all company levels.
Pricing, the support of AI Pricing Intelligence software
The most advanced Price Management and Price Optimization software can provide companies with solid support for pricing optimization, speeding up and automating the process of price definition and revision. At the heart of today’s most effective solutions is Artificial Intelligence, which can extract knowledge from large volumes of business data by performing complex analysis in a short amount of time. AI-based software can capture and analyze key pricing data such as production, sales and customer data and integrate it with data from external sources, such as competition data.
From these, demand and elasticity curves are determined, which are the key elements to understand how and when it is appropriate to change the price.
Pricing optimization and pricing management software, through customized dashboards in terms of analysis and KPIs, can become the primary system, shared between those who manage daily pricing activities and the management team, for analyzing performance and making decisions in favour of margins.
Moreover, thanks to the ability to combine different data (transactions, customer profiles, stock, promotions, etc.) an evolved AI Pricing Intelligence software allows to know better the customers to customize the offer and to perform forecast simulations to evaluate in real-time the impact of possible decisions on the main business KPIs: turnover, margin, stocks, etc.
The improvement of the commecial margin becomes, therefore, possible thanks to the strategic choice to better govern the price lever and is accelerated by the adoption of technologies that allow top management to make profitable decisions, based on data.