"The moment you make a mistake in pricing, you're eating into your reputation or your profits."

Increasing pricing is generally the most effective way of increasing operating profits. There is also a stickiness in pricing, that brings costs to changing price if it is not right. Formulating price policy is a process - it is important to think not about "what should the price be" but whether one has addressed all of the important and relevant considerations in setting a price policy.

What is a more effective way to increase profits: increasing price or increasing volume?

According to an often cited McKinsey study, the answer is increasing prices.


Source: Harvard Business Review

The survey of 2,463 companies made by McKinsey in the 1990s concluded that for a company with average economics, the profit implications of improving unit volume by 1% yields only a 3.3% increase in operating profit (assuming no decrease in price) whilst a 1% improvement in price (assuming no loss of volume) increases operating profit by 11.1%.

How difficult is it to change prices?

Prices are generally sticky. That is to say that prices are nominally rigid and resistant to change. Buyers and sellers are reluctant to change a price, despite changes in input cost or demand patterns. There tends to be a need for a significant disparity between the firm's current price versus the equilibrium market price.

There are 'menu costs' involved in changed prices. The term stands for the costs involved in the operational and logistical cost of changing prices. The actual costs of price adjustments would tend to include: