Fair price can boost corporate profits

LAHORE: The right pricing could increase company profits in an era when corporate profits are declining due to general decline in the purchasing power of the consumers and availability of technology that has made it easier to compare the prices of competitors.
Other sources putting pressure on prices are the large retailer chains that demand extra discounts on very large purchases, the experts claim. They point out that these newer factors have eroded corporate pricing power, increasing the discomfort of corporate bosses.
“Is it possible to think of increasing the prices in such stiff competition,” asked marketing executive Yusuf Ahmad. He said a product is priced at three levels. The first, he added is the industry level. The managers fix the retail prices in line with the prices of similar products marketed by competitors. The corporate bosses, he added have to keep in mind supply, demand costs and regulations.
“In order to keep generating revenue, companies have to increase the prices,” he said. A look at the sales profile of any product reveals that companies award discounts at the retail price to the distributors, large retail chains, apart from promotional discount to the retailers, cash discount or discount on achieving yearly sales target by the distributor, advertisement and freight. He said in such circumstances, the companies can increase the net sales price without increasing the retail price. He said right pricing at this level reduces downward pressures on prices and makes the company the price leader in the industry.
The next is the market strategy level where the company chalks out a pricing mechanism relative to competition. He said in doing so managers realise that customers go through all offerings and compare attributes of all similar products with each other and other advantages. With these analyses companies can set visible list prices which accurately reflect the competitive strengths or weaknesses of their offerings, he added.
Ahmad said the most important price level is the transaction price. He said the competence of corporate managers to decide exact price for each transaction could lead the company to new heights. He said they start from list price and determine which discounts, allowances, payment terms, bonuses, and other incentives should be applied at each transaction. He said this is the most time consuming task, requiring best expertise. The trick lies in capturing opportunities in transaction pricing.
Marketing guru Farooq Iftikhar said through prudent transaction pricing, the average price the company obtains from different modes of discounts could be increased. He said it has been established that an increase of one percent in average price of a product would generate an eight percent increase in operating profits, provided volumes and other cost variables remain stable. Similarly, he added a decline of one percent in average price would reduce the operating profits by eight percent if other factors remain stable. He said most of the companies can generate an additional one percent or more in prices if they carefully adjust the price of a product or service. Right pricing is a more delicate process than setting list prices or even tracking invoice prices. He said the leakages at customers discount, incentives, promotions and other give-aways could be reduced prudently to obtain some increase in real price.
He said in practice, pricing experts focus on invoice prices, which are readily available, but the net price is the one that matters in company profits. He said many off-invoice reduction in prices include cash discounts for prompt payment, the cost of carrying accounts receivable, cooperative advertising allowances, rebates based on a distributor's total annual volume, off-invoice promotional programmes, and freight expenses.
Iftikhar said a closer look at pricing mechanism of high turnover products reveals that the same product is sold at less than 30 percent of the standard list price in some cases while in few the price is 90 percent of the list price or more. He said to an outsider this range looks spectacular, but is in vogue in many product lines. He said an ice cream distributor may get a 30 percent discount. A medium size retailer 17 percent and the neighbourhood shop seven percent discount on listed price.