Making the most of optimal pricing takes time, analysis
and long-term commitment, says Professor Colin
Tourick.

 

Many lessors altered their businesses in response to recent
economic turmoil, but few improved their pricing methodology. This
is odd, because even small pricing improvements can yield
impressive results.

If you could increase your average
gross margin over cost of funds by 5% (from say 4% to 4.2%) without
volumes falling, how much extra profit would that deliver?

Robert Philipps in 2005 showed
that, depending on the market sector, a 1% improvement in pricing
can deliver an 8% improvement in net profit.

“That’s all very well,” I hear you
say, “but our market is very competitive. We already struggle to
write our current volumes and there is no scope to increase our
prices.”

How well do you really know your competitors?

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I am not suggesting you just raise
your prices. You should cut and raise prices where it will increase
your contribution, targeting the optimum price every time.

When the directors of large
European corporates were asked if they were in a price war, 55%
said “yes”. When asked who had started it, 94% said it was someone
else! Business managers are always pressured to cut prices, but
give in when they needn’t, or hold out for too high a price, losing
the deal.

Better they are armed with
information from the outset that tells them the optimum price,
maximising the probability of winning the deal at the highest
possible price.

This is achievable through
excellent price management practices. Research by Dr John Hogan in
2011 showed that companies with optimal price management practices
enjoy profit margins 24% higher than their competitors. Which begs
the question: are you identifying the optimum price to quote in
every situation? How much time and effort do you put into pricing
compared to, say, credit management or setting residual values or
maintenance budgets?

You already have the data you need.
You know what margins you earn by deal size, equipment type, client
type, distribution route, payment profile, payment frequency, term,
mileage (if you lease vehicles), etc. You know which quotes have
been successful. You probably also subscribe to some external
market data.

With this data you should be able
to build useful insights into your current pricing approach and the
direction in which you need to change your current price for any
permutation of the deal.

Having made that deliberation,
change the price and monitor the result. If the change increases
your net contribution, use that insight to help you decide your
next step.

This isn’t rocket science, but it
does require time commitment, analysis to measure demand elasticity
at the most granular level, and a willingness to see this as a
long-term process rather than a one-off exercise.

Professor Colin Tourick is the
author of the
Managing Your Company Cars series of
books