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Value-based pricing: The driver to increased short-term profits

Value has to be the primary driver in setting a pricing strategy. This can then deliver both higher profits and improved customer satisfaction, say Andreas Hinterhuber and Evandro Pollono. No business can afford to ignore the importance of pricing. Ensuring you are competitive as well as profitable is a central element of the FD role in any industry. For many FDs, though, pricing strategies are often left to out-of-date formulae and allowed to stagnate. Perhaps a new approach is needed.

Pricing - The profit driver

Pricing has a dramatic but frequently underappreciated effect on profits. A study of a sample of Fortune 500 companies showed the impact of pricing exceeded the impact of other elements of the marketing mix on profitability (Hinterhuber, 2004). An increase in average selling prices of 5% increases EBIT by an average of 22%, while other activities, such as revenue growth or cost reduction tend to have a much smaller impact. So why does pricing have a bigger impact on profitability than other tactical measures, such as growth or cost reductions? The answer lies in understanding and analysing customer value.

This is an extract from the Finance & Management Magazine, Issue 221, May 2014.

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