The Price : Volume Dynamic
What it is and how it works
Logic surely dictates that if you raise prices (and don’t change anything else) that you will make more profit; in fact, every penny more you charge goes straight to your bottom line – happy days!
So how much volume could you afford to lose? Surely it would be fair to assume that if you put your prices up by 5% then you could lose 5% of the volume and be back where you were before – WRONG (usually)! Every business is different – but the rule of thumb if you are a manufacturing business making a Gross Profit of, say, 30% is that you can “afford” to lose 14% of your volume.
And it gets better! If you were working at a 15% gross profit % and increased your prices by 5% you could “afford” to lose a whopping 25% of your volume – that’s a quarter of what you are doing now!! Or, in other words, you could be working at three quarters your existing level and still show the same profit – goodbye, busy fool!
If your current Gross Profit % is 30% (top row of numbers), and you were to increase your prices by 5% (shaded blue down left).
Then you can “afford” to lose 14% of your sales volume and still have the same profit as before.
If your current Gross Profit % is 30% (top row of numbers), and you were to reduce your prices by 5% (shaded orange down left).
Then you would have to generate 20% more sales to still have the same profit as before.
There is a sinister flip side to this coin: in these competitive times your sales team might quite possibly tell you “we must reduce our prices to get business”. Before you do anything – THINK!
If you are making a 15% gross profit and you followed the advice of your sales team and reduced prices by, say, 5% – then you would have to sell 50% – YES, that is 50% – more stuff (units/hours etc.) just to stand still.