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You Can Afford to Lose Sales, But You Won’t

#1 Price Leverage, Part 4

If you increase prices modestly (1-2%) or moderately (5-10%), how much volume could you afford to lose and still make the same profit?  This is a really valuable exercise to undertake.

Here’s why:  predicting volume loss precisely in the face of a price increase is really hard.  (Why?  There are a lot of variables that drive volume change, and we notoriously overestimate price sensitivity.)  Knowing exactly where that line is can give you the confidence to pursue a price increase.

Let’s use a sample company with a gross margin of 25%:

Price IncreaseVolume Loss for Break-Even
1%4%
2%7%
5%17%
10%29%

 

In plain English, this company can afford to lose almost a third of their sales volume with a 10% price increase and still break even.  The goal (of course) is to lose little to no volume, and I help companies apply variable, risk-mitigated price increases to accomplish just that.  The point is:  even with modest volume loss, you are typically still further ahead financially.

(This is the fourth of several blog posts that dive deeper into strategic pricing tips  posted on 8/14/14.)