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.