The margin is critical. A 30 percent margin of one million pesos means less than a 10 percent margin of ten million. In the first case, the margin in value corresponds to 300,000 pesos, while in the second it corresponds to one million. The performance in the first case looks high, which it is, but in the second the value for money is much higher, with a lower margin. Companies constantly analyze their margins, which is reflected directly in the profits finally.
The price is one of the relevant elements to obtain the sales volume of a company, being relatively simple the multiplication of the sale price by the number of units sold at that price. The sum of all those sales indicates the dollar value of the company’s sales. Decreasing a price indicates a direct impact on the margin and therefore on profits, something that is constantly sought to be avoided. Reducing prices means earning less.
With the intention of maintaining the best possible profitability, companies look for customers who are willing to pay the highest prices. Each market segment has an upper price limit that, when exceeded, stops buying the product. To maximize the profitability of the company, the conclusion would always be to sell at the highest price that the segment is willing to pay. There are environmental factors that affect these types of decisions. Among others you will find the same product with its characteristics. A segment of consumers willing to pay a high price, let’s say high-end, will demand a product with the best possible features. Being almost impossible to sell only to one segment, companies serve several with different products and prices, even in the same market. It is rare to find a company serving a single segment with a single product and a single price.
It would seem the most natural thing to sell only high margin products which usually have products with the best features. The high-end segment pays high prices for the products they are interested in, so it would seem better to only sell products to this segment. The decision is extremely difficult, since this segment is generally the smallest of all (it varies between 1% and 10% of the market). There is a global company that has just openly announced that its marketing strategy is precisely to sell only high-end products to consumers who pay the highest prices. A few weeks ago, Ola Källenius, CEO of Mercedes Benz, announced that his company will seek precisely that.
The strategy was launched in Monaco – a place frequented by the high-end segment – at an event called The Economy of Desire, announcing the new approach. The reason is that with this they increase their operating margin to 14%. Källenius says the biggest growth potential is in high-end luxury products. He estimates that wealth is growing everywhere and that high-end products can be bought by the segment that can pay the highest price.
Although the concept of selling at the highest possible price has always been sought after, leaving volume for margin is something new, and perhaps even risky. The reunion of the strategy arises when market conditions limit the quantity and types of products to be manufactured. Källenius says that this is what they have experienced due to the shortage of chips, which has motivated them to make this change. Only time will prove him right in this risky strategy.
By: Dr. Jorge A. Wise, Professor of Marketing and International Business at CETYS University, member of the CETYS Graduate School of Business