Do Business Well

Companies can increase profit either by cost reduction or by margin improvements. Margin improvement or improvement in the gross profit can be achieved either by increasing unit selling prices or by increasing sales volume (this includes the possibility of reducing unit selling prices in order to be more competitive and increase sales volume).

Selling prices are affected by supply, demand and cost conditions. All companies need to ensure that their pricing policy gives the best opportunity for maximising sales and profits.

1. Keep pace with inflation

The inflation rate is the percentage rate per period that prices are increasing and should provide a guideline to the level of price increases generally.

2. Keep an eye on competitors’ price movements

In a falling market businesses tend to take a more flexible approach to pricing in order to obtain a larger share of a diminishing market. In these circumstances a rigid and inflexible approach to pricing allows your competitors to take a proportion of your business. Smaller companies — which are growing in number day by day — with lower overheads are able to react very quickly and obtain orders through price flexibility. It is essential, therefore, that you know what your competitors are doing and that you adapt to the challenge of the circumstances.

3. Maintain information regarding changing price levels in the market place 

A business will only survive if it continues to receive orders from clients. It will only receive orders from clients as long as it is competitive. It is therefore necessary to ensure that policy decisions take account of the severity of price competition in the market place. Arrange to receive lost order reports from your sales staff, dealers etc. These reports should concentrate on orders lost on price.

4. Adjust selling prices to compensate for previous across the board increases

As an expedient, price increases are often fixed on an across the board percentage basis per product group. This may have resulted in distortions which need to be corrected. Some prices may be a few points too high or too low, thus affecting your margin or competitiveness.

5. Take advantage of market sectors in which you have a monopoly 

Unlike the normal laws of economics, price changes do not affect demand to the same extent where you have a monopoly. Prices for some of your products for which there is little or no competition, for example spares and service, can enjoy a higher mark-up.

6. Identify the price leader in your industry 

Some industries are dominated by a few sellers who set the trend for selling prices. Certain companies emerge as price leaders and others in the industry set their prices accordingly. Therefore it is important to assess correctly your relationship with your industry price leader. You may well be the price leader yourself, or it may be a competitor, either larger or smaller than you. Determine how your industry reacts to a change in prices by one of its members and identify the reaction of others in the industry — do they change their prices? Also identify the reaction of the customers — do they re-source their requirements? Some firms will always be a small percentage cheaper than the leaders no matter what their price level, and others will always be slightly higher. Their pricing strategy may be determined on the basis that they can survive adequately by taking that share of the market available to them at a slightly lower or a slightly higher price.

7. Recognise the effects of windfall profits on your selling price policy 

Profits (or lack of them) are usually reflected in the selling price policy. Low profits or losses can encourage price increases and high profits can encourage stability. Windfall profits or short-run profits should be adjusted for when determining your pricing policy. A large single order may have earned an adequate sales margin or provided full activity in the factory for a period. Such benefit may not be enjoyed in the future, however, so selling price policy should take windfall profits into account and therefore base the strategy on the underlying and continuing activities of the business.

8. Calculate the effect on profits of reduction in price 

Salesmen like to reduce prices in order to encourage sales, but the effect of doing so has always to be considered most carefully. Always calculate by how much sales must increase to achieve the same result as before. The effect of a price reduction is always to reduce the profit volume ratio and to raise the break-even point and shorten the margin of safety. When reducing_m prices to earn more business, ensure that there is a commitment to increase sales which results in an increased margin for the company.

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