In 1992, Michael Marn and Robert Rosiello of McKinsey published an article in the Harvard Business Review that every pricing book since has quoted. They took the average economics of 2,463 companies in the Compustat database and asked what a 1% improvement in each part of the income statement would do to operating profit.

What the article says

PublishedMarn and Rosiello, “Managing Price, Gaining Profit,” Harvard Business Review, September–October 1992, Exhibit 1.

Some summaries quote the price figure as 10.29%. The article says 11.1%, and I found no primary source for 10.29%. A 2003 McKinsey update by Marn, Eric Roegner and Craig Zawada, using the average S&P 1500 company, put it at about 8% Published.

The condition

The article’s sentence is precise: “a 1% improvement in price, assuming no loss of volume, increases operating profit by 11.1%” Published. Everything depends on that middle clause.

The article’s own numbers tell you how fragile that is. An 11.1% gain from 1% of revenue means operating profit was about 9% of sales. A 3.3% gain from 1% more volume means each sale contributed about 30% after variable costs. At that cost structure, a 1% price rise stops paying if it loses more than about 3.3% of volume Derived.

The 11.1% is what a price rise earns if nobody notices. Customers who’ve bought from you before always notice.

How much volume moves

The best summary of how volume responds to price is a meta-analysis by Tammo Bijmolt, Harald van Heerde and Rik Pieters. They collected 1,851 price elasticities from 81 studies, and the average was −2.62: a 1% rise in price, on average, came with a 2.62% fall in sales Published.

Put that average into Marn and Rosiello’s company and the 11.1% becomes about 2% Derived. An average across many categories isn’t your number, and a brand with loyal buyers and a product nobody else makes may do better. But zero is not a reasonable guess for your volume loss.

Do this

• Find your own version of the 11.1%. Take last year’s operating profit as a share of revenue and divide 1 by it. At 8%, a 1% rise with no volume loss adds 12.5% to operating profit. Then read the next chapter before you believe it.