How do you optimize prices in product management? Our guide outlines the key factors to consider for analysis and calculating profit margins.
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With the increasing competitive pressure from online platforms, prices are also coming to the fore again as part of the product range strategy. However, the subject is sensitive — when prices change by only a few percentage points, contribution margins and income react disproportionately. In this article, we explain how customers react to price changes.
Factors to optimize prices in product management
Price sensitive products
Price reductions or promotional prices are often requested as part of marketing measures in order to increase sales, win new customers or improve customer loyalty. However, not every product is actually price-sensitive: more or less favorable framework conditions can have a favorable influence on or prevent purchase decisions. Ultimately, the overall package is decisive for the customer – and not just the initially supposedly low price. Examples of less price-sensitive products are:
- Spare parts – the focus here is on service: fast and reliable availability offers the customer the decisive added value
- Additional products and articles that complement the main product: the price comparison is more likely to be carried out with the main product
- Exclusively listed items (also in sub-markets)
ABC analysis
In the case of exclusive articles, the greatest possible return can be determined through cost-benefit analyzes for the different customer groups – these are, however, complex and must be checked individually. It is easier and more effective to start with B and C articles — the leverage is less with these products, but improvements in this area can be implemented quickly and effectively.
Both the customers and the companies often have the conspicuous A-articles on their watch lists. It is not infrequently neglected that targeted income can also be generated with apparently less attractive by-products. Targeted price adjustments can be made for simpler products that are below the radar screen of customers and competitors. These have the additional charm that price increases can be implemented quickly, easily and inconspicuously. Examine these products specifically for their price structure:
- Why is the offer price moving at the current level?
- When was the last time you made a price adjustment there?
- Have the purchase prices for these products been raised by your suppliers in the meantime and have you not passed these price adjustments on to your customers?
- Are your offer prices adapted to optical price hurdles?
Calculation of contribution margin
A simple calculation to increase profitability gives the following picture:
With a current product contribution margin (DB) of 40% and a price adjustment of 10%, you will achieve a new contribution margin of approx. 45% (DB new). If, on average, the realized sales prices for all B and C articles can be increased by 10%, then the company revenues from regular business activities increase by 2% and the total contribution margin by approx. 5% (with a usual 80% A- Articles and 20% B and C articles).
Changing prices for price-sensitive products has a major impact on the contribution margin. ABC analyzes can help to categorize products, whereby the price changes can be individualized.
