Pricing and Profitability Management: A Practical Guide for Business Leaders

How to Integrate Pricing and Tax Functions—and Why

Connecting pricing and tax policies may sound daunting, esoteric, and costly to implement. But if firms wish to increase after-tax profits, then they must achieve at least some level of integration between them.

Consider two hypothetical competitors: Mesa Department Stores and Donner Home Furnishings. Both have sales strictly within the U.S. They have different tax situations because of various factors, including where the companies are headquartered and the location of their respective distribution channels. Donner is based in a more business friendly state that assesses lower corporate income taxes, and (unlike Mesa) it has a China-based operation through which it channels its imports to increase its operational efficiency.

For these reasons, Mesa's effective tax rate (ETR) is 39.5 percent, while Donner's is 36.5 percent. As a result, on an after-tax basis, Donner has additional cash equal to 3 percent of its income to use as it sees fit. Critically, the lower ETR will permanently benefit the company as long as the relevant tax regimes remain unchanged. Mesa may well have options to generate more after-tax cash from its operations, but it will require a better blending of its business and tax policies to achieve them.

According to an article in AMR Research Outlook, in environments where pricing is undisciplined and unstructured, the initial benefits of pricing management can result in a margin increase of 2–7 percent of sales ...