Wednesday, June 16, 2010

The 1% windfall

Been working on a project recently that requires a bit of proper thinking around pricing. I've written about pricing before. Although not often. It doesn't get the same air time as other areas within marketing. But it is so important. Look at this simple, yet powerful example:

A 1% increase in price could deliver a 20% increase in profits.

How? Let's say you sell something for a price tag of €100. And after operating costs, you walk away with €5 profit per unit. Now, if you increase your price by just 1%, your new price is €101. Your profit has now jumped from €5 to €6 - a 20% increase.

Of course, we need to assume that customers will continue to buy in the same amounts as before. This assumption clearly needs testing. But it is reasonable enough. Think of any product or service that you value and are willing to pay €100 for. Would you still value and buy it if it cost €101? I'm guessing you would. I would.

The point is that price decisions affect the bottom line immediately. The example above is from a good book called The 1% windfall.

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