Excellent price management practices can yield
impressive results, says Colin Tourick.
Go deeper with GlobalData
Many
dealer finance companies altered their businesses in response to
the recession, but few improved their pricing methodology. This is
odd because even small pricing improvements can yield impressive
results.
If you could increase your average
gross margin over cost of funds by 5% (from say 6% to 6.3%) without
volumes falling, how much extra profit would that deliver? Robert
Philipps in 2005 showed that, depending on the market sector, a 1%
improvement in pricing can deliver an 8% increase in net
profit.
But what if your market is very
competitive and you struggle to write your current volumes, with no
scope to increase prices?
I’m not suggesting increasing
prices. You should cut prices where it will increase your
contribution and also raise prices where it will increase your
contribution, targeting the optimum price every time.
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By GlobalDataBusiness managers are pressured to
cut prices, but give in when they needn’t. Or they hold out for too
high a price and lose the deal. It’s much better if they are armed
with information from the outset that tells them the optimum price,
maximising the probability of winning the deal at the best price.
This is achievable through excellent price management. You already
have the data. You know what margins you earn by deal size,
make/model, client type, payment profile, payment frequency, term,
mileage, etc. You know which quotes have been successful and you
probably subscribe to external market data. So you can see where
your current pricing approach works, and the direction in which you
need to change your current price and/or subvention payment for any
permutation.
Having made that deliberation,
change the price and monitor the result. If the change increases
net contribution, use that insight to help you decide your next
step. This requires time commitment, analysis to measure demand
elasticity at the most granular level, and a willingness to see
this as a long-term process rather than a ‘one-off’.
Professor Colin Tourick is the
author of the Managing Your Company Cars books
