Price - medicine or "energy drink" for profit?


Recent years brought an exciting time and extremely dynamic challenges for many companies. The pressure to stay in business and generate profit brought companies, already operating globally and experiencing strong competition, to notice the need to pay more attention to the issue of revenue management.

Pricing in the most general terms, specifies the organization's approach to determining, implementing, communicating and modifying prices. The pricing strategy is one of the most important management decisions, because it affects the company's profitability and shows the ability to move around the competitive environment. Despite the significance of the pricing policy in organizations, it seems that it is still underestimated. Price management through their appropriate definition and consistent implementation and modification, depending on changing external factors, supports achieving strategic goals of the organization.

The development of a pricing policy requires the full involvement of all departments in the organization. At the initial stage, the sales and marketing departments cooperate with each other, deeply believing that the developed pricing strategy, confirmed by the plan scheme, is achievable. However, the development of pricing strategy is only half the way the organization needs to go. A good knowledge about customers preferences and setting a proper price for it, it is just the beginning of the future success. This can easily be wasted by ineffective implementation. This means not only the implementation of IT systems or the preparation of tools supporting revenue management, but also the training of all members of the organization, so that each team member is aware of the implemented strategy, and that the organization's goals are known to everyone.

From that moment, whole company have clearly defined priorities, not only playing as one team, but also one goal.

The basic elements of the effective implementation of the pricing policy:

- defining pricing policy, make it understandable and acceptable by all departments,

- developing and presenting revenue management process to the organization,

- giving a high-ranking to price policy, supported by the Board,

- ensuring the training of employees on the way to the full involvement of each team member,

- developing and effective implementation of tools supporting sales process,

- presenting the very smart motivating bonus scheme,

- defining the clear scope of responsibilities in the organization,

- setting up the complete and regular monitoring of changes in prices and financial results.

Involvement as a key to success?

Active involvement of top management in pricing policy in the organization shows to all employees the level and importance of the process and increases the chance of strengthening the competitive advantage. It gives good head start compared to those who have not yet took advantage of pricing tools and are still focused only on cost optimization as one of the elements of profitability improvement.

The most precisely prepared pricing strategy might collide with reality one day.

Sales is the key business function, not only in terms of revenue, but also profit. Sales and Marketing Departments have a great influence over the way how sales processes are implemented - from creating offers, giving discounts, adding samples, proposing products to tests, creating packages, offering rebates for early payment and to finally modifying after-sales conditions. Sales department do have a real impact on the generation of additional revenue and profit and may easily give away discounts that were not foreseen at the time the strategy was created.

The power of the magic percent

Pricing is the fastest and most effective way for a company to achieve maximum profit. The right price can increase profit faster than the increase in volume. The wrong price can reduce this as quickly. Because of a fear of losing customers, many companies do not even try to take the initiative to improve prices. Meanwhile, the effects of not managing the price are much more harmful.

Obtaining the right price should be one of the most basic management functions.

It should be one of the board's priorities. Taking the following data into consideration, the price should always be in the centre of attention of the management.

                             source: Managing Price, Gaining Profit, Harvard Business Review

Many managers, deciding to lower the price, count on a higher sales volume, which will compensate for the loss of income caused by the lower price. In the meantime, to compensate for the revenue lost by 5% of price reduction, the company would have to increase its volume by 18%.

Any decision on price reduction should always be thoroughly considered

Urszula Karwowska

Assistant Manager

Gekko advisoryNOW