This is the time of year, at least in the western part of the world, when we are looking over our price lists for the upcoming year. We either increase our product prices to cover for increased costs or decrease our prices in order to be more competitive. Either way, it is important to know how a price adjustment will affect your profit.
Imagine you have a product with a list price of 1000 EUR, a cost price of 800 EUR and of which you sell a volume of 100 units. This will generate a turnover of 100000 EUR with a profit of 20000 EUR from that particular product. A decrease in the list price with 10%, by adjusting your list price downwards or giving a discount, will affect your turnover in that way that you have to sell 12 more units to reach the same turnover. However, for you to gain the same profit on this product you have to double your sales.
If you instead decide to increase your list price with 10% you can sell 9 units less and still obtain the same turnover. With a 10% list price increase you only need 2/3 of your current sales to gain the same profit.
You can go in for being the cheapest on the market and hope to by this way generate a greater sales volume. This strategy will make a smaller business very vulnerable. In tough times of decreased sales due to customer budget austerity, a small business will be left with significantly reduced profit. For a small business it is of more importance to keep good margins in order to cope with sales fluctuations.
Whatever strategy, it is important to keep in mind how a price adjustment will affect your turnover and profit.
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