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The Big Lie About the Power of Price

You’ve probably heard the thing about how a tiny 1% pricing improvement can generate a 7-11% profit improvement, right? Of course, you have.

Since the early nineties, pricing consulting firms and pricing technology companies have been using this little calculation as proof…proof of the power of pricing…as evidence of the tremendous leverage afforded through pricing…as a key reason to get serious about pricing improvement.

That’s all well and good…because for the most part, it’s true.

Pricing improvement is an extremely worthy aspiration and objective. And, small improvements to realized price can indeed generate huge bottom-line impacts for a typical B2B company…particularly those with relatively thin margins to begin with.

The problem is, however, that this calculation gets used to justify virtually any sort of tactical pricing activity or task…as though any day-to-day pricing activity has this sort of power…as though any sort of pricing improvement or efficiency gain has this type of leverage…as though any type of pricing technology can produce bottom-line impacts of this magnitude.

And that’s the big lie.

Not all pricing activities, functions, and processes are created equal. And most tactical pricing activities simply do not have the necessary leverage to produce the across-the-board 1% improvement in realized prices that is reflected in the calculation.

Sure, preventing errors on a price list or invoice can produce a bit of money here and there. And, reducing the number of steps involved in an approval process can save some man-hours. But to generate the truly significant results, you have to get beyond tactical activities and incremental process improvements.

To truly leverage the “power of price” in your organization, you have to focus on strategic solutions …because that’s where the real pricing power lies.

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