TapRun Consulting

The Pricing Newsletter

September 2018 issue

Howdy Pricers!

Did you realize it's already September? Many of us are sending our children off to school.

Did you know what's even more fun than schooling your kids? Schooling your competitors!

Now is a great time to revise your pricing strategy and increase your profitability.

Pricing Question from a Reader

Today's question comes from reader K. S.

I started working for a new business and noticed that some of our products have much higher margins than others. I've argued that we should get rid of the low margin items and focus on the high margin ones. My bosses disagree. Which of us is right?

Without more information, I can't say for certain, but, all things being equal, you're right: companies are better off selling high margin items.

Unfortunately, all things are never equal in the real world. There are many reasons why your company may benefit from its decision to continue offering products with low margins.

For instance:

Of course, there are other factors to consider too, not the least of which are manufacturer payment terms and minimum advertised price requirements. One of the most important is often forgotten due to a misunderstanding of pricing terminology.

Most people mistakenly believe that the words profit and margin mean the same thing.

They don't.

We intuitively expect a correlation between the two. It seems reasonable to assume that a product with a higher margin would yield a higher profit.

Unfortunately, this is not always the case. Some firms with very low margins earn an awful lot in profit. Likewise, some firms with very high margins barely make any profit at all. One can look to the restaurant industry for a prime example. McDonald's rakes in billions of dollars each year for relatively low margin items, while gourmet restaurants that charge an arm and a leg are lucky to scrape by.

It all comes down to turnover (the speed at which items are sold). The faster a business can sell a given product, the more often it can re-invest its income into additional inventory. Even if a vendor earns pennies on each sale, over enough sales it can earn a tidy profit.

At the end of the day, business owners, stockholders, and analysts only care about one thing: economic profit. The margins on each sale and the pricing of each item are merely the means to an end.

Questions come from readers like you. If you'd like your questions answered, send them my way.

Pricing in the News

From the Blog Archives

Notable Pricing Quote

"Maturity is a high price to pay for growing up." -- Tom Stoppard

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