Considering the impact of inflation and lagging economic growth on the books of eCommerce shops and retailers in Europe and the UK, taking advice from the world’s leading speaker on pricing and profit may be a good idea. Professor Hermann Simon, who founded Simon-Kucher & Partners; who has published more than 30 books on business and pricing; and who has a business school named after him in Hong Kong would be the ideal choice; which is why Omnia Retail was impressed and delighted to have him join our panel of keynote speakers at our annual Price Points Live event in Amsterdam last month.
During tough economic times, there are numerous topics and issues that Prof. Simon could’ve focused on, but in the name of giving the best advice to retail players keen on heeding his guidance, Prof. Simon shared his thoughts on two important things: The importance of goal-setting and answering what true profit really is. In the final article in a series of articles focusing on the interesting topics shared by our keynote speakers, we will share Prof. Simon’s insight on true profit and setting the right targets.
What is true profit?
“Profits are the cost of survival and the creators of new value,” says Prof. Simon in his book True Profit! No Company Ever Went Broke Turning A Profit. Although this sentiment is powerful and inspiring in its own right, the nitty gritty of the meaning of true profit is far more direct: “True profit is what the entrepreneur can keep after the company has met all contractually agreed claims of employees, suppliers, banks, and the state.”
Profit and pricing: Setting goals and avoiding common mistakes
Prof. Simon says one of the biggest causes of profit weakness is having the wrong targets or goals. He surmises that most businesses, 47%, are volume-oriented and only 28% are profit-oriented. “Profit orientation is the only meaningful goal because it is the only one that observes both the market side and the cost side. Elimination of profit killers is the most effective way to profit improvement. This especially applies to price wars and overcapacities, since they are the most dangerous profit,” says Prof. Simon. Other causes of profit weakness include having incorrect incentives for employees such as sales commissions; overstretched diversification; or responsibilities in the management board.
Profit drivers other than price include volume in 2nd place and cost in 3rd respectively. However, price is the most effective, as a 1% price increase yields a 10% profit increase, according to Prof. Simon. When it comes to pricing, Prof Simon states that the most important thing to understand about it is value, or value to the customer; and this should be a key factor when businesses price their products: “Price and value must be balanced!”
When it comes to the most common mistake businesses make when it comes to pricing, Prof. Simon says it is when one’s costs are used as a basis when formulating prices. In addition, to make it worse, all costs are used, including fixed costs. “Fixed costs are not influenced by price and volume.”
When it comes to inflation
Considering the fact that Prof. Simon’s leadership at Simon-Kucher has helped the company achieve $522 million in revenue in 2021, most business owners are keen to hear his thoughts on how to sail through it without hitting too many waves. “For companies to survive and grow, they need to get the cash in as quickly as possible and then spend it as quickly as possible” as inflation is fundamentally the devaluing of money.
Watch Prof. Simon’s full interview at Price Points Live as well as the interesting panel discussion at the end of the event here.