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Seamus Parfrey
How a 1% Difference Can Make All the Difference!
by Seamus Parfrey

A 1% improvement can go a long way in increasing business bottom line profits. Two studies, as reported in 2004, undertaken by the consulting firms McKinsey & Co. and A.T. Kearny demonstrated that a 1% improvement in costs and pricing resulted in significant net income increases as shown in the following table:

1% Improvement in   

McKinsey

A.T. Kearny

Reducing fixed costs

2.7%

1.5%

Reducing variable costs

7.3%

4.6%

Increase price 

11%

7.1%

Increasing sales volume

3.7%

2.5%

Rafi Mohammed in his book The 1% Windfall published in 2010 calculated that a 1% increase in price with no change in demand would increase operating profit for the following companies as follows:

 Sears

155%

 Tyson

81%

 Whirlpool

34%

 Amazon

23%

 Wal-Mart

18%

 Home Depot

16%

For a business with mostly fixed costs a 1% pricing improvement would have a significant bottom line effect. This can be achieved by focusing on strategic pricing rather than increasing efficiency by lowering fixed costs. Better pricing is more than simply raising prices. The key is to offer a variety of pricing options with a win win strategy which allows customers to pick the pricing option that works best for them.

The clear lesson for businesses is that concentration on modest increases can make a significant difference to business profits.

parfreyNew
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