How to Raise Profits

By Mark Kolakowski

culled from:about.com
Methods for Raising Profits: In general, there are three basic methods for raising a company's profits. Increasing sales volumes (presuming, of course, that the products or services in question already are priced such that they yield profits), cutting costs or raising prices. In today's business and economic climate, in the opinion of leading consultants, the first two options pretty much have been exhausted by most companies. That leaves more aggressive pricing as the most promising option, in most cases.
The Role of Financial Managers: Especially in companies with state of the art management reporting systems that provide profitability measurement down to a fine degree of granularity, chief financial officers (CFOs) and controllers should take a leading role in any discussion concerning price setting and pricing policy. In fact, in many cases they should be stimulating such discussions if they have not begun already in their companies.
Price Elasticity Considerations: An important consideration, though, is the price elasticity of demand for the products and services in question. This is a fundamental economic concept. Below a certain price point, increases in price will result in fewer units sold but more total revenue. Above that price point, increases in price will suppress the volume of sales so severely that total revenue will decline. Good market research, bolstered by management science expertise, should indicate whether demand for the product or service in question is elastic (the former case) or inelastic (the latter scenario) given the current price.
Luxury Goods: In the case of luxury goods, it has long been known that high prices add to their appeal and thus to their desirability among wealthy consumers. This is the theory of conspicuous consumption, as explained further in our discussion of evolutionary finance. That is, consumer behavior regarding pricing is exactly the opposite with respect to luxury goods than it is in the case of all other goods. The latter frequently are referred to as "normal goods" in economic parlance. If your company is the luxury goods market, or if any of your product or service offerings might be considered as such, you should press to take full advantage of your opportunities to price aggressively.
Quality Signals: In the case of so called normal goods, consumers often assume that a higher price is reflective of higher quality. This is, of course, not always the case. Even supposedly more sophisticated business buyers can make the same erroneous assumption. For example, a particularly revealing Harvard Business School case study on this topic from the late 1970s covered the travails of an upstart manufacturer of tractors that sought to take on the established international leaders in the field by undercutting their prices. Even though independent tests indicated that the upstart's products were superior in many respects, and even though reported customer satisfaction among previous buyers was very high, new prospective buyers often were deterred by this company's lower prices, taking them as a strong indicator of lower quality. Sales volume actually increased when prices were raised to match or exceed those of the competition, a situation typically associated only with luxury goods bought by conspicuous retail consumers.