Archive for the ‘Profit Models’ Category

HITS: Earn higher profits by pushing the “The Latitude of Price Acceptance”

November 26, 2012

HITS: HomaFiles Ideas To Share

Punch line: Relatively small increases in price can generate large increases in profitability … that’s called price-profit leverage.  And, relatively small increases in prices are low hanging fruit for practically all products and companies since consumers have “zones of price indifference” or, in other words, a “latitude of price acceptance”.

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Price-profit Leverage

According to McKinsey Increases in price typically have 2 to 4 times the effect on profitability as proportionate increases in volume.

More specifically, given the cost structure typical of large corporations, a 1% boost in price realization yields a 5% to 15% net income gain.

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Latitude of Price Acceptance

Customers have a latitude of price acceptance —  a range of possible prices within which price changes have little or no impact on their purchase decisions.

Customers frame their LPAs from the price range that they observe, say, in-store vs. online, or regular vs. sale prices.

LPAs vary for different categories of products that customers buy.

A McKinsey & Co. study shows that LPAs can range widely: from 17% for branded consumer health and beauty products to 10% for engineered industrial components and apparel to only 2% for some financial products.

The 2% for financial products may seem paltry, but the McKinsey study indicates that a financial services company moving from the middle to the top of a 2% LPA band for personal loan products would generate an 11% increase in operating profits for those products.

Source

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Buyer behavior & LPAs

Scanner panel data analyses for sweetened and unsweetened drink      categories support the presence of a region of price insensitivity      around a reference price.

  • Consumers with higher average reference price have a wider latitude of price acceptance.
  • Consumers with a higher frequency of purchase (i.e., shorter average interpurchase time interval) have a narrower latitude of price acceptance, because they are more aware of the range of price distributions.
  • Consumers with a higher average brand loyalty have a wider latitude of price acceptance, demonstrating greater tolerance of price fluctuations.

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Takeaway: Know the LPA … then go for it … don’t leave easy $$$ on the table.

Source

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Maximizing (transient) shareholder value

October 23, 2008

Excerpted from Business Week: “Put Investors In Their Place”, Clayton M. Christensen and Scott D. Anthony, May  28, 2007

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Why pander to people who now hold shares, on average, less than 10 months?

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The credo that management’s primary obligation is to maximize shareholder value is shaky to begin with, distorts managers’ sense of responsibility, and …  has been rendered obsolete by developments in the capital markets.

How did managers develop this risky fixation? The entreaty to maximize investor value … came from economists. Calculus is a primary analytical tool of microeconomics. At some point, some now-defunct economist seems to have said: “Let us assume that managers’ responsibility is to maximize shareholder value.” Through endless repetition, nearly everyone came to assume that managers are responsible for maximizing shareholder value.

Through the 1960s … the average shareholding period was more than five years. Managers seeking to maximize the long-term strength and growth of their companies could reward these patient shareholders.

But today shares are held, on average, less than 10 months. Should managers really regard such investors, whose investment horizons are so short … as stakeholders whose value they ought to maximize?

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Perhaps it is time for companies to adjust the paradigm of management responsibility: “You are investors and speculators, not shareholders, and you temporarily find yourselves holding the securities of our company. You are responsible for maximizing the returns on your investments. Our responsibility is to maximize the long-term value of this company. We will therefore act in the interest of those whose interests coincide with our long-term prospects, namely employees, customers, the communities in which our employees live, and the minority of investors who plan to hold our securities for several years.”

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[It’s time to] curb a shareholder value paradigm that has run amok. Well-intentioned, smart managers are systematically destroying companies by failing to take actions they know are right in the long term. Instead of slavishly serving an antiquated and increasingly irrelevant [maximization] function, managers should find ways to reward investors and stakeholders who want innovation, not plunder.

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Full article;
http://www.businessweek.com/magazine/content/07_22/b4036100.htm?chan=search

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