The Profit Lever Every CFO Should Be Using in 2020

At any point in time, smart CFOs have one, if not many, cost-cutting initiatives underway.

Why?

Chiefly, Profit = Price – Cost.

A ground-breaking study by McKinsey, published in the Harvard Business Review, found that a 1% improvement in variable cost yields operating profit improvement of 7.8%.

graphic-profit-lever-1

And a 1% improvement in fixed costs returns 2.3% improvement.

Cost: The Go-To Profit Lever

Not only that, there’s always (theoretically) room to improve costs.

Plus, low costs are a competitive advantage.

Also, when economic uncertainty rears its ugly head as it often does—through trade tensions, softening in global markets, Fed interventions, consumer anxiety, and other turbulence—costs feel safe to focus on.

You can measure cost, you can exert control over cost, you can rein it in and stomp it out.

And executed correctly, cost-cutting initiatives can yield strong ROI.

A Much Bigger Lever

But, what if there was a bigger lever you could pull?

Let’s go back to the profit equation:

Profit = Price – Cost.

What about price?

For most companies, price receives far less attention.

And yet it’s price, and not cost, that is the single biggest profit lever you can pull:

graphic-profit-lever-2

A 1% improvement in price creates operating profit improvement of 11.1%.

That’s a huge lever.

Pull it and you could see big returns.

With the right capabilities it’s easier than you think to correctly pull the price lever to drive immediate and lasting impact, without increasing business risk.

Interested in giving pricing a look? Book a quick discovery call with our price optimization experts and learn more.

 

Jared Wiesel

Jared Wiesel is a Senior Vice President at Revenue Analytics. In this role, he serves as the practice area lead for Manufacturing and Distribution. Jared has led and executed project work across four continents with experience in multiple industries including retail, consumer goods, automotive, manufacturing, amusement and entertainment, freight, and specialty services.


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