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Premium pricing reflects competitive advantage and provides companies with their biggest performance lever for boosting top-line growth, according to Winning the Profit Game, a new book written by three consultants and a professor from the University of Toronto.
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The book argues that pricing is at the same crossroads as procurement was a decade ago. It is often considered a low-level task that is subject to guesswork and many companies lack the tools they need to be confident in their pricing. As a result, most managers rely on past decisions and their own judgment to price products and services, unconsciously creating formidable obstacles to the coordination of price, brand, cost and product development. This means that companies learning to price well can achieve a significant competitive edge.
The authors analyzed the impact a one percent improvement to four common profit levers (price, variable cost, volume and fixed cost) would have on operating profit across the Standard and Poor's 500. They found increasing price one percent would boost profit by 7.1 percent. One percent reductions to variable cost or fixed cost produced operating profit improvements of 4.6 percent and 1.5 percent, respectively. Increasing volume by one percent translated to a 2.5 percent gain in operating profit.
“Pricing is actually a better use of management time than cost-reduction projects,” the book reports. “Even though cost can sometimes be reduced by higher percentages, price improvements have greater leverage on the bottom line.”
The authors, Robert G. Docters, founder of Abbey Road Associates; Michael R. Reopel and Jeanne-Mey Sun of global management consulting firm A.T. Kearney; and Stephen M. Tanny, a professor at the University of Toronto; state their case for the link between price and brand, showing a powerful relationship to revenue growth. The approach aims to turn pricing into a logical, high-return activity that is integral to developing new products and services.
By putting brand at the center of their framework, the authors challenge the conception of branding as a mysterious concept separate from pricing. Rather, the two are inextricably linked and a superior price strategy cannot exist without a detailed brand strategy.
Winning the Profit Game outlines a plan for growth in any business environment and offers a how-to guide for optimizing price, brand, cost and product development. The book explains why seamlessly integrating these elements is a must and offers many tips and real-life examples for doing so. Executives reading the book will learn tools to help them:
Develop an effective, integrated price and brand strategy
Use price as a language that speaks to customers
Optimize prices to increase revenues
Manage ongoing revenues
Penetrate new markets using price as a competitive wedge
Transform an organization into a price and brand powerhouse.
More information on Winning the Profit Game is available from www.profitgame.atkearney.com.
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