Strategies to raise prices

Trying to cope with higher costs, but pressured by customers to keep prices down? Here are some ideas.

1). Differentiate your product. If your product is unique, you have more flexibility. If it's a knock-off of other products, it's a price-sensitive commodity. Don't assume your customers know the unique features or benefits, spell it and sell it.

2). Disguise the price. If you're a retailer, group your products into combinations that make price comparisons with competitors difficult.

3). Think long-term. Price increases are a tough problem to solve short-term. If you have new products in development that are copies of other products, stop...how can you make them better? If you want a better margin, what strategic goals can set to get there in the next 12 months? Are there low margin product lines you should drop?

Impact of a Price Increase & Decrease on Gross Profit and Sales Volume.

by Jon Hedges

As managers consider price increases or decreases, many times the potential financial impact to the business is not completely clear.

There is a way to calculate the impact of a price increase or decrease, and how much total sales would need to drop off (for a price increase) or increase (for a price decrease) for gross margin dollars to remain the same.

To make things simple, simply refer to the charts below.

Impact of a price increase

If you increase your prices, how much business can you lose and keep gross margin dollars the same? Look at the chart below to answer this question.

Find the gross margin of your product in the left column, then find the column that shows your price increase. Where the two numbers intersect is a number that shows you how much business can drop off as a result of a price increase and maintain gross margin dollars.

For example, if you have a 40% margin, and you are considering a 10% price increase, sales of your product can drop off 20% and you will still have the same total gross profit dollars.

  Price Increase
Current Margin +5% +10% +15% +20%
30% -14% -25% -33% -40%
35% -13% -22% -30% -36%
40% -11% -20% -27% -33%
45% -10% -18% -25% -31%
50% -9% -17% -23% -29%
copyright 2004 Hedges & Company

 

Impact of a price decrease

If you decrease your prices, how much business do you have to gain and keep gross margin dollars the same?

Find the gross margin of your product in the left column, then find the column that shows your price decrease. Where the two numbers intersect is a number that shows you how much business has to increase as a result of a price decrease and maintain gross margin dollars.

For example, if you have a 35% margin, and you are considering a 10% price decrease, sales of your product must increase a whopping 40% for you to have the same total gross profit dollars.

  Price Decrease
Current Margin -5% -10% -15% -20%
30% 20% 50% 100% 200%
35% 17% 40% 75% 133%
40% 14% 33% 60% 100%
45% 13% 29% 50% 80%
50% 11% 25% 43% 67%
copyright 2004 Hedges & Company

As you can see, the Free Market blesses those with high margin. If you have a thin 30% gross margin and you drop your prices 20%, you must increase total sales by 200% to have the same gross margin dollars. This is the percentage of increase on top of current sales, so in other words if you sell 100 widgets in a year, a 200% increase means 300 per year [100 + (100 x 200%) = 300%].

Copyright 2004 Jon Hedges, all rights reserved. Limited reproduction crediting the author and web site HedgesCompany.com is permitted.

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