NBOP National Board of Operations Professionals

Part one. The CostLesson 5 of 15

The half percent

A price change of half a percent usually beats a cost reduction of five, and nobody proposes it.

The instrument The half percent test

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Model three changes of equal effort: half a percent on price, five percent off a major cost line, and five percent more volume. For most businesses the price change wins, frequently by a lot, because price falls straight to the bottom line while volume brings cost with it and cost reduction has a floor. The arithmetic is not controversial. What is interesting is organizational: almost nobody proposes the price change. It is the only one of the three where a specific person has to have an uncomfortable conversation with a specific customer, and where the downside is immediate and attributable while the upside is diffuse. Put all three on one page. Alone, a price increase is a proposal somebody has to defend. Beside the alternatives everyone already accepts, it is arithmetic.

Take your profit and loss statement and model three changes of the same effort: half a percent on price, five percent off a major cost line, and five percent more volume.

For most businesses the price change wins, frequently by a lot, because price falls straight to the bottom line while volume brings cost with it and cost reduction has a floor.

The arithmetic is not controversial. What is interesting is organizational: almost nobody proposes the price change. Cost reduction programs and volume targets are proposed constantly.

The reason is that the price change is the only one of the three where a specific person has to have an uncomfortable conversation with a specific customer, and where the downside is immediate and attributable while the upside is diffuse. Cost programs distribute discomfort internally. Volume targets distribute it into the future.

The instrument is to run the model and put all three on one page, because the comparison is what makes it discussable. Presented alone, a price increase is a proposal somebody has to defend. Presented against the two alternatives everyone already accepts, it is arithmetic.

Half a percent is deliberately small. The exercise is not about a bold repricing, it is about noticing that the smallest available price move outperforms the largest realistic cost move, and asking why only one of them is ever on the agenda.

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