3 ways to raise profits without raising prices

Earlier this week, I talked with Utpal M. Dholakia, a professor at Rice University’s Graduate School of Business, about whether it’s a better inflation strategy to raise prices little by little or all at once. He made an interesting point. “If I were to consult with a company, my advice to them would be you should never just increase prices,” Dholakia, a marketing and pricing expert, told me. “Think of all the other ways you can actually make a higher profit, a higher margin without even changing prices at all.”

So I had a follow-up conversation with Dholakia about the topic. He said that there are three approaches to making a higher profit without focusing solely on price changes when it comes to consumer products and services.

High-low pricing 

“The decision-making is all about the price structure, not the price level,” Dholakia says. A high-low pricing structure is always superior to an everyday low pricing structure. “You do not want to keep all prices the same.” An example, “a grocery store where the high prices are the regular prices, and then they have sales, which makes the price low,” he says. “So the prices constantly fluctuate between regular prices and sale prices.” If you do it properly, Dholakia says, price promotions are a way to increase your margin. “Typically, you want to run new promotions to get customers into the store,” he explains. “Or, you want to run a promotion to get rid of old inventory, which is what Target is doing, and other retailers as well.”

The nation’s largest grocery store chain, Kroger (which ranked No. 21 on this year’s Fortune 500 list), has been deploying this strategy well. “While customers continue to cook more, we are seeing different shopping behaviors based on how individual customers are experiencing the current inflationary environment,” Kroger CEO Rodney McMullen said Thursday on the company’s earnings call for the quarter ending May 21. “Many customers continue to shop premium products throughout the store, including Private Selection, Murray’s cheese and Deluxe Meal Solutions.”

McMullen continued, “For other customers, whose budgets are more directly impacted by food and fuel inflation, they are actively looking for ways to save.” He also said, “Overall, we think the customers are doing a lot of work on balancing their total budget, and we continue to balance it as well with promotions, and then customers are aggressively starting to buy our brands.” Kroger’s sales were $44.6 billion for the quarter, compared to $41.3 billion for the same period last year. Excluding fuel, sales increased 3.8%.

Itemized pricing 

“Simple price structures are generally not as effective as complex price structures,” Dholakia says. “You want your pricing to be somewhat more complicated.” That’s where itemized pricing (the practice of having a ‘base’ price plus several option add-ons) comes in. “When consumers are given itemized prices, they tend to underestimate what the actual price really is,” he says.

Dholakia cites the airlines as a good example of this. “In the late 1990s, when the first major airline started to charge extra for checking in your luggage, there was a big uproar,” he explains. “Airlines used to provide full meals on flights 20 years ago; then they started to unbundle food. Everyone was really upset and said they’d never fly the airline. People protested and complained a lot, but they didn’t really change their behavior.”

Product-line management 

“Say you’re selling five or 10 different products, every product has a certain cost structure, and it has a certain margin that you are earning,” he says. “If you just keep all your prices unchanged, but just simply sell less of your low margin products and more of your high margin products, you’re going to make more money. And the amount of money you make can be very substantial if you are smart. In my opinion, this is probably the most powerful way to increase your profits without changing prices.” Look at restaurants: “If you go to that restaurant and listen to what the waitstaff recommends, the day’s specials are always the high-margin items which they are trying to push.” For lower-priced items, you have to find them on the menu yourself, he says.

Although these practices exist, many companies continue to raise their prices, citing inflation and rising gas prices. These companies may have no choice as they “really have a problem with costs; their input costs are really going up,” Dholakia told me. “But there are some companies which are raising prices opportunistically,” he says. “They see that this is an opportunity to earn a higher margin. ‘Everyone else is raising prices; let us also raise prices and make some money.’”

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Fortune is observing Juneteenth on Monday, June 20, so the next CFO Daily will be in your inbox on Tuesday. Take care. See you next week.

Sheryl Estrada
sheryl.estrada@fortune.com

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Big deal

Willis Towers Watson's (WTW) 2022 Global Benefits Attitudes Survey found that 30% of U.S. workers struggle financially, and 43% have difficulty meeting basic needs. More employees are living paycheck to paycheck, according to the report. The survey also found that 36% of workers said employer-provided resources helped improve their financial situation, an increase from 27% in 2017. And 46% said they want financial apps and tools to be a core part of their employee benefit programs. The findings are based on a survey of 9,658 U.S. employees at large and midsize private companies. 

Going deeper

In case you missed it, here’s what was featured in CFO Daily this week:

Companies like Twitter and Coinbase have rescinded job offers to save money. But they’re paying a price

What’s the better inflation strategy, raising prices little by little or all at once?

After his company was spun off from IBM, this CFO had to attract a new set of investors

35% of CFOs expect the economy to be even worse by 2023

Leaderboard

Some notable moves this week:

Jennifer Biry was named EVP and CFO at McAfee Corp. (“McAfee”), an online protection company, effective June 20. Biry will succeed Venkat Bhamidipati. Biry joins McAfee from WarnerMedia, where she served as EVP and CFO. She brings over 20 years of experience in corporate finance, operational practices, and M&A. Prior to her most recent role at WarnerMedia, Biry served as CFO for three of AT&T’s largest business units, AT&T Consumer, AT&T Business, and AT&T Technology and Operations.

Dennis Cinelli was named the first CFO at Scale AI. Cinelli will oversee strategic finance, accounting and corporate development. He previously led Uber’s business and finance teams for six years, serving as VP and global head of strategic finance, supporting Uber’s 2019 IPO and leading the global finance teams for all Uber businesses (Rides, Eat, Freight, etc.). He also spent over a decade at GE, serving as CFO of GE Ventures, and currently sits on Lime’s board of directors.

Rob Dillard was named CFO at Sonoco (NYSE: SON), a sustainable global packaging company, effective July 1. Dillard, 48, joined Sonoco in 2018. He most recently served as the company’s chief strategy officer. During his time with Sonoco, Dillard has led the development of the company’s overall strategy. Prior to joining Sonoco, Dillard served as president of Personal Care Europe and VP of strategy and innovation at Domtar Personal Care, a division of Domtar Corporation. Prior to that, he served as president of Stanley Hydraulics and VP of business development at Stanley Black and Decker.

Omar A. Haynes was named Interim CFO at XpresSpa Group, Inc. (Nasdaq: XSPA), a travel health and wellness company. XpresSpa announced the separation of service of James A. Berry, effective June 13. Berry joined the company as CFO in December 2020. The company will conduct an executive search to fill the position permanently. Haynes joined XpresSpa as associate director of finance in March 2017, served as director of finance, analytics and treasury from January 2019 to June 2020, and then treasurer and senior director of finance from June 2020 to May 2021. Previously, he was an associate at Alvarez & Marsal and Conway, Del Genio, Gries & Co. 

John McCauley was named CFO at Calendly, a scheduling automation platform. McCauley brings nearly two decades of B2B financial and strategic experience to his new role. Prior to joining Calendly, McCauley was the CFO of Seismic, a global sales enablement company. Previously, he held senior financial strategy positions at Illumina and ServiceNow. He began his career in assurance services at Ernst & Young.

Sergio Ribeiro Passos was named CFO at Atento S.A. (NYSE: ATTO), a customer relationship services and business process outsourcing company. Passos, 55, replaces Jose Antonio de Sousa Azevedo, who left the company on June 9. Passos has over 24 years of experience as a CFO at different companies within the customer experience sector, including Teleperformance, G4S and Tecnología Bancaria SA. For the past three years, Passos has worked at Atento Brazil as CFO and corporation as FP&A strategy director. Atento will switch from having five regions to three: North America, South America and EMEA. 

Overheard

"I guess we finally ran out of microchips."

—Billionaire Microsoft co-founder Bill Gates jokingly responded to a tweet from The Daily Show that joked about Microsoft retiring its iconic web browser Internet Explorer. “Wow, Bill Gates encourages everyone to get vaccinated, then a year later, Internet Explorer dies. Coincidence???” The joke referenced the conspiracy theories surrounding Gates and his involvement with the rollout of the COVID-19 vaccine, Fortune reported. One such false claim is that Gates wants to use mass vaccination to implant microchips into people to track them digitally.