What’s the biggest lever you can pull to drive profitability?

Pricing is an element of marketing that is misunderstood. It’s often set in a boardroom, on the back of a cigarette packet, at the stage of brand conception or when strategy is being developed. But today we are going to talk you through how to look at pricing from a different angle. Pricing is a very important tactical lever that should be explored a few steps after conception and strategy, when you start to consider your tactical marketing plan. 

Pricing tells a story_

Storytelling in marketing is nothing new. But we often forget the powerful stories that pricing tells about our product or service. 

There’s a story behind why Air Jordans are so expensive. By buying a pair of Air Jordans, a middle-aged, unfit recreational basketball player can be like Mike. 

There’s a story behind Louis Vuitton, the luxury handbag designer who claims to have not discounted a product for over 30 years, whilst other luxury brands are bending to market pressure and discounting to meet targets. 

There’s a story behind Walmart’s price promises, and why they promise to save the average american family $2500 per year by shopping in their stores. 

Pricing is one of the key levers a company can pull in telling a story about its products. 

But it’s also one of the key levers you can pull when it comes to driving profitability.

The four levers of profitability_

Revenue is vanity, profit is vanity and all that jazz. 

Driving profitability has to be the number one goal of any business, and when it comes to reviewing how to do this, organisations can turn to four levers:

1. Price

2. Sales

3. Fixed costs

4. Variable costs

Recently, research was carried out by Wharton Business School, part of The University of Pennsylvania, on a whole range of strategic decisions by 100’s of companies and has worked out what the best drivers of profitability are. 

Here’s what is tells us_

If you try to pull the lever of sales, by engaging your sales force to work harder and drive sales by an increase of 1%, then the impact of that figure would be an increase of profitability by 3.3%. 

In contrast, if you flick the lever of fixed costs, doing what you can to reduce your overheads by 1%, then the impact would be a profitability increase of around 2.5% on average. 

When it comes to variable costs, if you somehow manage to reduce your variable costs by 1%, for example negotiating with suppliers on ingredient costs for a confectionary product, then the impact on profitability would be 6.5% increase on average. 

But, if you take the pricing level, and manage to increase your prices by just 1%, then the impact would be a staggering 10.3% increase in profitability. 

So what is clear from the very rigorous data is that price is one of the most important factors to consider when looking at your commercial strategy, and actually it is one of the easiest levers to pull. 

Based on this information, you would think that companies would be consistently increasing their prices across the board, right? 

Nope. The reality is that a lot of businesses turn to discounting and reducing prices as a way to increase sales. It’s clear that these businesses are obsessed with revenue growth, but this comes at the cost of missing the bigger picture and the obvious goal, which in most commercial organisations, has to be profitability. 

A lesson from Apple_

You only need to look at the global smartphone market to see the clear problem with focusing on revenue growth. 

In Q3 of 2019, Samsung held a market share of total unit sales of over 22%, and Huawei wasn’t far behind with 18%. Compare this to Apple’s 13%, and you wouldn’t be alone in wondering what a god-like brand like Apple was doing! 

However, the story turns when you begin to look at the more important figure of profitability. (Hold on to your seat!)

For the time period of 19/20, Samsung was achieving an average sales price of $290. In contrast Apple was demanding an average unit sale of $750. This is a really strong signal of Apple’s pricing strength and the results speak for themselves. 

Samsung held a 33% share of profit for the same time period, which is pretty impressive and one of the best results Samsung has had in recent years. 

However, Apple’s pricing power, brand power, and ability to focus on premium pricing without getting distracted by volume sales, allowed it to hold a massive 66% share of profit for the whole industry. 

As you can see, Apple and Samsungs incredible 99% share of profit doesn’t leave much room for any other competitors in the market to win. 

A closing question_

It’s clear that pricing tells a powerful story, and is a potent tactical tool in helping to drive profitability. 

What story does your pricing say about your brand? 

Our team at Outlaw are very passionate about pricing being a fundamental part of marketing and we regularly run pricing workshops with our clients. As qualified Design Sprint practitioners and Lego Serious Play facilitators, we have a series of tools to run energetic sessions that bring clarity and strategic direction to pricing for brands. 

If you have a pricing challenge, we’d love to hear from you.

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