Price is the most underappreciated and most powerful variable when it comes to improving profitability. Especially in tight economic seasons, companies pinch pennies and scrape to drive efficiencies across all areas of business. Businesses reduce inventory, tighten logistics, streamline and automate operations and get creative about pushing down input costs all along the supply chain. However, it’s no secret that manufacturers across all sectors - especially those in commodities-based markets, from food to plastics and minerals, are running out of ways to counter rising costs and new economic realities.
So what about price?
It should be no secret that price has the most powerful impact on profit. Starting with a study by the Harvard Business Review back in 1992, followed up by McKinsey and Gartner more recently, the research proves the importance of price. Compared with improvements in inventory reduction, unit sales and cost of goods sold, a one percent improvement in price drives an 11 percent improvement in operating profit.
Earlier this summer, a Managing Automation article titled “Is the Price Right?” reported that “[m]anufacturers that take advantage of price management software can reap 10% to 20% margin improvements and a 3% to 10% bump in revenue” according to Noha Tohamy, research director of AMR Research.
Despite its direct impact on margins, price is easily the most neglected aspect of operational infrastructure. So why is price strategy and optimization all too often neglected? That is a topic for another post, coming soon…