#1 Price Leverage, Part 1
This is the first of several blog posts that will dive deeper into strategic pricing tips posted on 8/14/14. We’ll start with #1: Price “Leverage:”
I recommend this step to clients and audiences:
Calculate what a 1%, 2%, 5%, or 10% price increase would translate to in bottom-line profit for your business. (This isn’t financial wizardry. See the simple formula at the bottom of this post.) “Bottom-line profit” could be EBIT (earnings before interest and tax) or EBITDA (earnings before interest, tax, depreciation, and amortization) or whatever financial bottom-line measure you typically use to measure profitability for your business. The pricing “lesson” is the same.
Take, for example, a client with 10% bottom-line profit (10% EBIT):
- A 1% price increase translates to 10% increase in EBIT.
- A 2% price increase translates to 20% increase in EBIT.
- A 5% price increase translates to 50% increase in EBIT.
- A 10% price increase translates to 100% increase in EBIT.
This is a 10X impact. Each percent increase in price translates to ten percent increase in bottom-line profit.
This is tremendously important. Understand that very small changes in price makes an enormous impact on profitability. Changing pricing is equivalent to using a pulley system on your profitability! (Any technical folks out there who love the idea of mechanical advantage applied to the finances of your business?)
*The simple formula for bottom-line profitability improvement is:
If you do not use EBIT, simply replace EBIT in the above formula with your profit measure.
(This is the first of several blog posts that dive deeper into strategic pricing tips posted on 8/14/14.)