Pricing is one of the fundamental drivers of a business. It is worth shining a light on how it works within a business as any improvements in pricing go straight to the profitability line or as accountants say, they go straight to the bottom line.
The issues
There is plenty to look at in pricing:
- Are price points per customer optimised? Taking into account the competition how much demand is there per product, product group etc? Is the demand matched to the price you set?
- How much management attention is given to discounts? Are there trade discounts (e.g. wholesalers get a standard 15% discount whereas retail gets 10%)? Are there additional trade deals with individual customers, such as volume discounts, seasonal price reductions etc? Do these discounts make commercial sense?
- Who has the power to implement these discounts? If it is a sales function, how much management oversight is there?
- Are any attempts made to measure the benefit of discounts or to establish how much discounts cost your business?
- What type of analysis is done on credit notes? Are they categorised (price difference, incorrect goods sent, breakages, short supplied) and investigated to see if they can be reduced? Are they measured month by month?
What do studies show?
It is interesting to look at a study done by Deloittes. They examined 100 case studies which focused on pricing and found that on average a 3.2% benefit was achieved. Some delivered over 20% while some delivered 1%.
The study also showed that in many cases results were achieved within eight to ten weeks of beginning an investigation. What is also interesting about the study is that in examining businesses’ pricing policies, benefits were experienced in other areas such as marketing, order management, logistics and management accounting.
Management is the art of motivating staff, organising and controlling a business. Examining pricing can lead to substantial benefits – 3.2% pricing improvement means a 3.2% profitability gain.
Strengthening and controlling your pricing policy will result in an improved business.
© CA(SA)DotNews is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.
