Many companies don’t realize how much more profitable they could become through creative pricing. Even just a single percentage-point price increase can make a big difference to your bottom line: McKinsey & Company found that a 1% uptick in prices translates to an average 11% rise in operating profits. Pricing expert Rafi Mohammed shows you how to maximize your gains with “value-based pricing” and how to implement a range of pricing strategies and tactics to attract new customers and keep current clients buying. Although the prose can be dry at times, this manual provides crucial points to consider. getAbstract recommends it to those who set their products’ prices, including CEOs, CFOs, managers, entrepreneurs and marketers.
Pricing Your Way to Higher Profits
Pricing your product or service appropriately is an excellent way to increase your profits. And it’s not just about raising your prices, although the “1% windfall” is illustrative: The average bump from a 1% price increase is an 11% gain in profits. And if Sears, Amazon or Walmart raised their prices by just 1%, their operating profits would soar by 155%, 23% and 18%, respectively, based on the effect an income increase would have on their market capitalization. Pricing is a corporate and marketing strategy that offers a wide variety of tactics and options for boosting profitability.
Don’t just use cost-plus pricing that reflects your expenses. Instead, use value-based pricing, which reflects what customers are willing to pay for your product rather than what it costs you to produce it. If you charge only one price, you may miss out on business from potential customers who want to pay more or less than your set fee. Street vendors understand this concept: They raise the price of umbrellas when it rains since they know passersby will pay extra to stay dry.
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Rafi Mohammed, PhD, founded Culture of Profit LLC, a consulting company that helps businesses design pricing. He also wrote The Art of Pricing.