Pricing Naïveté

We’re pretty passionate about pricing, and I’d like to think that when we win a client’s business it’s because we offer answers that better address the critically important, but sometimes subtle, nuances in pricing.  We sometimes use this slide to demonstrate where we play:

So it’s pretty gratifying when that idea is validated by our clients.  We recently won a pricing project and were told that one of the big 4 consulting firms pitching the work was still using the old line:

“a 1% improvement in price equates to an 8% gain in operating profit on average”

Now mathematically, that’s true.  But only if:

  • your operating margin is 12%, and
  • you raise prices across the board by 1%, and
  • don’t lose a single unit, then

you will indeed see an 8% gain in operating profit.  But few businesses have the temerity for a wholesale 1% price increase across all products and all channels and in all markets.   And what lucky soul has an elasticity of exactly zero?

We’re thrilled to see that the consumers of pricing analytics are maturing so that they can see these howlers for what they are.