My recent post explaining how to calculate the "breakeven points" for a price change generated quite a bit of interest. So far, I've received almost 40 requests for the Excel worksheet I mentioned in the post. Obviously, pricing is an important topic for many printing company managers.
And it should be! Pricing is the single most powerful profit lever that most managers can employ on a daily basis.
A few years ago, I used data from PIA's annual ratio studies to compare the effect of a price increase vs. cost reductions on profits. Specifically, I compared the impact of a 1 percent price increase, a 1 percent reduction in the cost of materials and outside services, and a 1 percent reduction in operating expenses on the profits of an average $10 million sheetfed printing company.
For this dataset, a 1 percent price increase would cause profits to increase by 100 percent. Let me repeat that. A 1 percent price increase would cause profits to double. A 1 percent reduction in operating expenses would cause profits to increase by 64 percent, and a 1 percent reduction in the cost of materials and outside services would boost profits by 35 percent.
The profit impacts will vary depending on a company's cost structure and current profit margin, but I've performed this analysis for dozens of companies, and the results are always the same. No management action can increase profits more quickly than raising prices a percentage point or two.
Unfortunately, price is also a double-edged sword. Nothing will cause profits to fall faster than allowing prices to slip down by one or two percentage p0ints. For example, if a 1 percent price increase will boost your profits by 50 percent, a 1 percent price decline will reduce your profits by the same 50 percent.
What this means is that managers need to pay very close attention to pricing decisions. Winning even small price increases can be very beneficial to profits, and giving even small discounts can be very costly.
How powerful is price in your company? I've created a worksheet that will enable you to answer this question. If you'd like a copy, e-mail me at ddodd(at)pointbalance(dot)com.
Discussion
By Bob Lindgren on Apr 19, 2010
I completely agree about the power of price, but the discussion ignores the impact of price on sales volume. The profit impacts described are correct only if price changes have no impact on sales, which seems very unlikely. It's easy to imagine a circumstance where a price reduction could raise or an increace lower total contribution contribution to overhead and thus profits. My experience has always been that high profit printers fully utilize capacity. That requires a value pricing approach committed to selling the capacity that one has created.
By David Dodd on Apr 21, 2010
Bob,
Thanks for your comment. You are absolutely correct that this analysis (and the worksheet) assumes no changes in sales volume. And I would agree that large price changes will affect sales volume. The important point, though, is that small price changes can have a big impact on profit, especially in a company with low profit margins.
By Tom Bson on Apr 27, 2010
Bob, although your point is right on the money, we have found a mix of product that has allowed us to increase pricing and increase volume, simultaneously. In regards to capacity, our utilization hovers around 90%. All of this has greatly increase our profits turning our facility into a cash cow for our organization.
Discussion
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