Understanding the impact of pricing on profit – An STC Classic


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In a recent Harvard Business Review post Rafi Mohammed reported on an interesting McKinsey study on the relationship between price increases and profits. Just to build a bit of suspense mentally answer the following question – “How must would a 1% price increase boost your profits?”

In the study McKinsey worked with the Global 1200. They found that a 1% price increase – if the demand remained constant – would result on average in an 11% increase in profits. Not bad. Think how many more units those companies and yours would need to sell to achieve an 11% increase in profits at your present pricing.

The overall moral of the story is – it is worthwhile to have an accurate assessment of the impact of price increases and price concessions on profit. For example, have you unknowingly sanctioned the dramatic decrease in profits by driving revenue gains by permitting your sales team to negotiate price reductions?

The key to the McKinsey study was of course – “if demand remained constant.” So, what on some actions for making that happen? Let’s take a look.

  • Get serious about training your sales team to sell value.
  • Help the sales team develop an understanding of the competitor’s products and pricing structure.
  • Reexamine the sales team’s compensation structure and make sure it is align with selling profit.
  • Review with Marketing the merit of offering basic and premium versions of your products.

Republished with author's permission from original post.

Richard Ruff
For more than 30 years Richard Ruff has worked with the Fortune 1000 to craft sales training programs that make a difference. Working with market leaders Dick has learned that today's great sales force significantly differs from yesterday. So, Sales Momentum offers firms effective sales training programs affordably priced. Dick is the co-author of Parlez-Vous Business, to help sales people have smart business conversations with customers, and the Sales Training Connection.


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