Pricing for Profit.

It is very difficult in the current recession to make a price increase stick. The bad publicity from even suggesting a price increase can be enough to drive customers to competitors. The more realistic objective should be to increase gross profit margin. In many companies the list price is an aspiration as volume discounts, rebates and other supports reduce the effective price paid by the customer.

To improve the gross profit margin the first step is to list the top 20% of products in terms of sales volume by customer and gross profit margin by customer (usually you will have captured 80% of the business). Take the products at list price and expected gross profit margin and then compare the results with the actual price and margin received. 

The results will highlight the margin leakage by customer (can be 20% or more) and this allows you to creatively tackle either specific customers or specific products. Stay focused on the top 20% otherwise you will have too much data and not be able to see the wood from the trees.

You can look at volume discounts, rebates including lta’s, settlement discounts, support including technical support. You can look at product bundling and targeted discounts. Buy two and get them for x price which is net net. The focus is on how to creatively change the buying pattern of customers giving them a good deal while reducing margin leakage (look for 3% to 5% improvement).

It may be necessary to focus on a small number of customers to address very favourable terms which are not justified by reduced volumes or credit risk. In general customers will prefer reduced discount to increased prices but it may be possible to increase business by giving target purchases with rebates to specific customers.