The Link Between Pricing and Profits

The Link Between Pricing and Profits

While most CEOs realise that pricing improvements can drive profit gains, failure to implement a sustainable pricing infrastructure often occurs due to a lack of know-how.

The international food and beverage corporation PepsiCo recently demonstrated this link and reported that their operating profit increased by 8% as a result of a price increase.

This PepsiCo example highlights the trade-off that must be considered when increasing prices which will inevitably lead to a loss in sales. However, as Pepsi have shown profits can still be increased. While this will satisfy senior management and shareholders, it can lead to disharmony in sales teams, in particular where sales bonuses are volume-based.  Often salespeople will respond by offering additional discounts to their customers to try and retain their volumes.

There are several methods to address this issue. The first of these is to make salespeople aware of the change and the reasons behind it, before the increase is implemented. This will help gain their acceptance.

Simulation tools that highlight the increase in profitability will demonstrate to salespeople how the increase will improve profitability of their own customers, even if volumes fall.

Of course businesses can remove the main cause for concern by changing sales bonuses to profit-based bonuses – so they are less concerned with volumes.

Finally, simple rules on discounting can be implemented. Setting maximum and minimum or floor prices for a product line will help ensure that the sales people cannot discount too heavily.

Whichever approach is chosen, a software solution will further allow you to track the effects of the increase, and importantly the discounts given by sales teams. The best pricing tools can collect, analyse and report on discounts and rebates and give increased visibility of the key parts of the price waterfall.

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