Pricing is a touchy topic during periods of rapid change. Today's climate of soaring oil and gas costs caught transportation-related by surprise and the red ink is flowing. Airlines and trucking companies are scrambling, attempting to cope with soaring fuel costs. Rail transport, which moves tonnage most effectively, is gaining favor with long-distance shippers. Individual families may forego vacations this summer, opting for what has now been coined "staycations," or simply staying at or near home for their fun. Utilities and service companies now add fuel surcharges to normal billings in an attempt to stay up with fuel increases. The indirect effects of the fuel cost spike are price increases on other goods and services.

As price increase announcements appear, customer backlash often slows sales volume. A drop in sales then leads to the temptation to offer customer discounts to gain or retain volume. Discounting or rebating to protect sales is a very slippery slope. Rather than protect sales, smart businessmen focus on protecting the gross margin dollars needed to cover fixed expenses and turn a reasonable profit. The trouble is, many sales representatives and sales managers fail to understand how quickly discounts and other give-aways erode margin. Here is a chart that clearly shows how much sales dollars must increase given various percentages of price discount in order to produce the same dollars of gross margin.

	Sales Increase Needed to Earn Same Gross Profit

		Current Gross Profit
Price Cut	10%	15%	20%	25%	30%	40%
1%	11.1%	7.1%	5.3%	4.2%	3.4%	2.6%
2	25.0	15.4	11.1	8.7	7.1	5.3
3	42.8	25.0	17.6	13.6	11.1	8.1
4	66.6	36.4	25.0	19.0	15.4	11.1
5	100.0	50.0	33.3	25.0	20.0	14.3
6	150.0	66.7	42.9	31.6	25.0	17.6
7	233.3	87.5	53.8	38.9	30.4	21.2
8	400.0	114.3	66.7	47.1	36.4	25.0
9	1000.0	150.0	81.8	56.3	42.9	29.0
10		200.0	100.0	66.7	50.0	33.3

15			300.0	150.0	100.0	60.0

20				400.0	200.0	100.0

25					500.0	166.7

For example, when a firm with a 30% gross margin gives a five percent discount, that firm must increase sales revenue by 20% to generate the identical amount of gross margin dollars! A ten percent discount requires a 50% sales increase to generate the same gross profit.

Another thorny problem occurs when competitors delay price increase, hoping to pick off additional business from the market leader. Rather than rescind an announced increase, a useful response to competitive foot-dragging is to implement a temporary competitive allowance for a stated, brief period. The tactic holds business and demonstrates to competitors that they have nothing to gain by delaying their increases. Once the temporary allowance period ends, the original price increase automatically becomes effective. Generally, market leaders have nothing to gain and much to lose by rescinding a price increase needed to cover higher direct costs. Remember, your competitors face the same cost increases as do you.

Justify price increases. Simply announcing an increase without telling customers the reason(s) for the change is a big mistake. It also helps if you can tie a price increase to improvements in your product or service offering. Your explanation helps your sales team sell the increase and maintain your good customers.

Don't forget to add your margin to your own cost increase. For example, if you receive a 5% cost increase and your margin is 30%, you will need to raise your price by 7.15% to retain your same 30% margin percentage on future sales. Simply raising your own price by 5% will erode your future margin to about 29%. It doesn't sound like much, but one percent less on your overall sales each time there is an increase will lead to big trouble!

Whenever possible, give customers advance notice of the increase so that they can adjust their own pricing in an orderly manner. You will probably buy ahead of the increase, and so will your customers, so be prepared for larger than normal orders just ahead of the increase date. Price changes with advance notice are generally considered fair, whereas immediate increases create more resistance and they are perceived as unfair.

Do the right thing to protect your long-term business viability and treat your customers fairly. Customer loyalty, normal inertia, and reluctance to 'switch suppliers' should allow a good supplier to retain all or most of the business. Refer to the chart above when the temptation to give away all or part of your needed increase pops up. Everyone, including your sales staff, relies on the long-term success and profitability of your business for their livelihood.

Marketing Facets - The Market-focused Guide to Company Analysis

Should a salesperson's birth date be an important fact for a company acquirer to know? Could extended product warranties create a competitive advantage? How does the company forecast sales? What are the backgrounds and capabilities of the firm's key managers? Answers to these and a vast array of other in-depth questions receive attention in Marketing Facets.

Marketing Facets is a practical resource for those involved in determining the current health of a company and gauging its future prospects. Marketing Facets is a 103-page guidebook, and a supplement to other evaluation procedures and information normally gathered during a thorough due diligence or business valuation process. The workbook takes a holistic approach, assembling facts and management assumptions in key areas to help the analyst form and support conclusions.

Marketing Facets is a valuable resource to private investment fund managers, individual investors, venture capital specialists, investment banks, and valuation specialists. Marketing Facets is also a guide for C-level executives who wish to perform their own company analysis as part of normal business planning, or in advance of efforts to refinance, acquire or divest.

Marketing Facets is available in electronic form via the Internet, on CD/ROM, or in print with a ring binder.
> Electronic in MS Word .doc or Adobe .pdf format via the Internet @ $79.95
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> Ring binder version and CD/ROM combo @ $99.95 including U.S. shipping and handling

Consulting is also available. Please contact me for additional information.
Telephone: 972.931.7993 Fax 972.931.0542 rpmorgan@morganmarketingsolutions.com.

Smiles make the day!
About our economy

1. Economists say we must devalue the dollar. That's what Congress has been doing for years!

2. Owning a compact car can be very economical. If you go out with another couple, you have to take their car.

3. Congressmen are always in favor of economy, except in their home district!

4. The only part of our economy that is looking up is the cost of living.

5. Our economy is delicately balanced. The minute vehicle prices come down, fuel goes up.

6. Economy size means large in soap bars and small in automobiles.

7. With today's inflation, we're making more and more dollars and less and less money.

8. Economizing means reducing some other person's take home pay!

$ Million Marketing Tips

TIP: The future is unpredictable, so prepare contingency plans based on multiple market possibilities.

TIP: Business buyers are not much more logical than consumers. There are emotional elements in every sale!

1. On any given day, half of the people in the world will eat rice.

2. Your thumbnail grows more slowly than your fingernails.

3. Porcupines are good swimmers. Their quills are full of air.

4. Christopher Columbus never had his portrait painted. We can't be sure what he looked like.

5. The most popular liquor in Scotland is vodka.

6. Until 1937, the referee tossed a jump ball after every basket in basketball.

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IN THIS ISSUE

Pricing gets dicey in a rapidly changing economy

Marketing Facets - The Market Focused Guide to Company Analysis

Smiles make the day!

$ Million Marketing Tips