Chief Pricing Officer

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…

As is - unfortunately - too often the case with government economists, Federal Reserve Bank of Atlanta President and CEO Dennis Lockhart told us last week what we already know: Prices are too high.

Lockhard said that food prices have inflated 6.5 percent through the first half of 2008, while motor fuel jumped 32 percent and home utility costs rose 21 percent. According to Lockhart, those three things account for 25 percent of all consumer spending.

There was good news too, as Lockhart also predicted that inflation would ease as the overall sagging market naturally tamps down inflation. But, there’s still only one key takeaway for American manufacturers and consumers: It’s going to cost more to produce things and buy the products made.

The easing of inflation will be a welcome respite for all involved. But, ultimately, it will be like that 90 degree day after it’s been in the 100s for days straight: It’s nice, but still not too comfortable. Inflation, or at least volatility, will be with us for awhile, and price is quickly becoming the new flashpoint for the 21st Century. For manufacturers, smart pricing is essential in an inflated market - finding the correct balance between cost and demand, as supply prices spike, is quickly becoming the most important new business calculus of our time. Companies that have the correct insight into how to properly buy and sell will emerge as the new leaders, while those that don’t will struggle.

That’s an easy side to choose.