How Recovering Costs Can Destroy Your Share Price

Conventional wisdom tells us that a 6 cent increase in costs requires a 6 cent pricing increase to maintain margin - unfortunately for companies interested in maintaining their margins raising price to match costs won't be enough to keep investors happy. As more and more chemical, pharmaceutical, and other manufacturers stress their high margin %s as a justification for higher multiples in their stock price, Wall Street analysts are paying nearly as much attention to margin %s as overall results.

In this example below, a company has successfully raised priced each year to match increased costs. Their reward? A large drop in their margin % and likely a large dip in their stock price to match.


Understanding how to properly structure price increases to maintain margin is just one important consideration for an organization's pricing efforts. For guidance in this area or to understand more of the challenges to optimal pricing, feel free to contact us anytime.

Why pricing delivers vs. cost cutting measures

Almost any literature you read from consulting firms or pricing software vendors will without a doubt state the case that improvements from pricing have much larger effects than improvements in fixed costs, variable costs, etc. As this has become commonplace more and more literature simply assumes this benefit advantage without exlaining the logic behind such an assumption.

While it is true that $1M in pricing improvements would have the same impact as an equivalent $1M reduction on variable costs, pricing's placement on the income statement provides it with leverage over smaller cost buckets - thus making it much more likely for organizations to have $1M in pricing improvements available to them vs. $1M in cost reduction.


As the above diagram depicts, this sample organization would need to cut variable costs by 2.9% to have the same impact as a 1% increase in price. Fixed costs would likewise require a 4.3% reduction to have a similar impact. Organizations looking to take their profits to the next level need to understand cutting costs will only take you so far - as pricing has the ability to take you 3-4x further at similar levels of effort.