In our previous article, we examined some of the reasons of why Pricing Strategy & Management is not always a beloved topic by marketeers and we scratched the surface of the many benefits that Pricing provides. In this article, we illustrate the “Pricing Amplifier Effect” and show how it can BOOST your marketing budgets. After all, big or small, marketing budgets are NEVER enough! So if you need more resources, this article is for you. Fasten your seat belts, some numbers ahead!
First, what do we mean by “Pricing Amplifier Effect”? Simply put, it is the disproportionate additional profit driven by additional Pricing revenue. To illustrate this point, let us imagine we run a fictional drinks company called “Scotch & Co." which generates gross annual sales of £100 million. Price Discounts & Trade Promo represent 30% of gross sales, Cost of goods is 50% of Net Sales (NSV), and Advertising and Consumer Promotions account for 20% of NSV. Finally, we have overheads of approximately 15% of NSV. Therefore, “Scotch & Co.” has an Operating Profit of £ 10.5 million.
Now, imagine for a second that “Scotch & Co.” acts on the 2 following Pricing levers:
- A price increase of +2% on a £70 million NSV. If inflation often lies around 2% p/a, a 2% increase should cover COGS and other cost increases, and limit Gross Margin erosion. This increase generates an additional, £1.4 million revenue.
- An efficiency of 5% on a £30 million Trade Discounts & Promo budget. If “Scotch & Co,” saves 5% on Trade Discounts and Promotions (remember that chunky 30% of Gross Sales?), this is a savings of £1.5 million. These efficiencies can be found everywhere, such as eliminating poor promotions (have a look at the sell-out vs. length, depth and frequency) or aligning promotional investments more effectively behind priority channels or clients…
These 2 actions generate a total of £2.9 million in additional revenue or savings that flow directly into the Operating Profit because they are not affected by production, marketing or overheads costs. Therefore the original £10.5 million Operating Profit rises to £13.4 million. These two simple Pricing effectiveness actions generate +4% in additional NSV and an additional +24% increase in Operating Profit! This, is the amplifying effect of pricing!
Now, about that marketing budget boost... If, instead of passing all this additional revenue to Operating Profit, you invest it into A&P, then the marketing resources go from 14 to nearly £17 million, i.e +21%! Imagine what could be done with those extra £2.9 million… Market research, extra media flights, new developments… And if all the extra revenue can’t be passed onto marketing, at least you can strike a deal with your boss to keep, say, half of this extra revenue IF Pricing initiatives deliver as planned. Now, that’s a sweet deal that should make marketers LOVE pricing !
Of course real life is more complex (product portfolios with different margins, price elasticities, brand equities, established pricing and promotion investments habits and not to mention, unchallenged habits… But the point here is to help realize that Pricing can unlock virtuous circles to grow brands. This is what we do at Brand Reveal (and other things too). If you want to unlock the power of Pricing, in drinks or in FMCG, let’s have a conversation.
In the next article, we will give you some tips to get started with a Pricing project...