Meaning
Adjustment of product or service pricing occurs when the spread between production cost and revenue falls below a set target. Margin repricing is a process used to restore the profitability of a business unit after an increase in the cost of inputs. It involves a systematic review of every price point and the underlying expense structure that supports it.
This action is taken when the cardinal profit per unit no longer covers the overhead.
Profit Correction
Realigning the price with the current cost of doing business ensures the long term survival of the organization. Margin repricing often happens in response to inflation or changes in the supply chain. By increasing the price, the company protects its ability to reinvest in its own growth.
Such a correction is a signal to the market that the value of the product has changed relative to the environment. Managers use this mechanism to stabilize the cash flow of a declining division.
Cost Realignment
Analyzing the internal expenses that go into a product can reveal areas where efficiency has dropped. Margin repricing is not only about charging more but also about spending less to produce the same result. It is a two sided process that looks for a better balance between what comes in and what goes out.
Revenue Sensitivity
Predicting how customers will react to a price change is a difficult part of the process. If the margin repricing is too aggressive, the volume of sales may drop so much that the total profit decreases. This risk must be measured against the cost of doing nothing.
