How a price increase or decrease affects gross profit vs. unit sales
(To calculate gross margin, go to the bottom of this page)
If you're considering a price increase or decrease, you should also look at how your gross profit is affected and how many units you need to sell to maintain the same gross profit dollars. You need to know how total unit sales can drop (for a price increase) or need to increase (for a price decrease) for gross profit dollars to remain the same. The numbers may surprise you.
How a price increase affects gross profit and total unit sales
If you increase your prices, how many fewer units can you sell and keep gross profit dollars the same? Look at the chart below.
Find the current gross margin of your product in the left column, then find the column that shows your price increase. Where the two numbers intersect you'll see how many fewer units are required for you to sell and maintain the same gross profit dollars.
For example, if you currently have a 40% margin, and you are considering a 10% price increase, you can sell 20% fewer units and you will still have the same total gross profit dollars in the end.
| If you increase your prices, how can unit sales decrease and maintain the same gross profit dollars? | ||||
| Price Increase | ||||
| Current margin, before a price increase | +5% | +10% | +15% | +20% |
| 30% gross margin | -14% | -25% | -33% | -40% |
| 35% gross margin | -13% | -22% | -30% | -36% |
| 40% gross margin | -11% | -20% | -27% | -33% |
| 45% gross margin | -10% | -18% | -25% | -31% |
| 50% gross margin | -9% | -17% | -23% | -29% |
copyright 2009 Hedges & Company |
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How a price decrease affects gross profit and total unit sales
If you decrease your prices, how many more units do you have to sell to keep gross profit 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 how many more units you have to sell as a result of a price decrease to maintain the same gross profit dollars.
For example, if you have a 35% margin, and you are considering a 10% price decrease, you must have a whopping 40% increase in unit sales to end up with the same total gross profit dollars.
| If you decrease your prices, how much must sales increase to maintain the same gross profit dollars? | ||||
| Price Decrease | ||||
| Current margin, before a price decrease | -5% | -10% | -15% | -20% |
| 30% gross margin | +20% | +50% | +100% | +200% |
| 35% gross margin | +17% | +40% | +75% | +133% |
| 40% gross margin | +14% | +33% | +60% | +100% |
| 45% gross margin | +13% | +29% | +50% | +80% |
| 50% gross margin | +11% | +25% | +43% | +67% |
| copyright 2009 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 double your unit sales (i.e., increase by 200%) to have the same gross profit dollars.
Gross margin calculation
If you sell a widget for $100, and you had to pay $60 for it, your "cost of goods" is 60%, "gross margin" is 40% and you produce $40 in "gross profit dollars" or "gross profit."
The math is: (Selling Price) - (Cost of Goods) / (Selling Price). In other words, subtract cost of goods from your selling price, which results in gross profit, then divide gross profit by the selling price. Here's an example: Let's say you sell a product for $125.95 and your cost is $83.50. That means you generate $42.45 in gross profit for each product sold. $125.95 - $83.00 = $42.95 gross profit. So, $42.95 / $125.95 = 0.341 = 34.1% gross margin.
If you want to reach a specific gross margin and you know the cost, the math is: (Cost of Goods) / 1-(Gross Margin %) = (Selling Price). In other words, if you pay $60 for a widget and want a 40% gross margin, subtract 40% from 1 to get .6, so $60/.6 = $100 selling price. Here's an example using the same numbers as above. Let's say your cost on a product is $83.00 and you want to make a 34.1% gross margin. Subtract 0.341 from 1 to get .659, and $83.00 / .659 = $125.95.
Note that mark up and gross margin are two different things. "Mark up" defines how much you're going to add on to a product cost to reach a selling price. "Gross margin" defines how much you make in gross profit at a specific selling price.
Using the example above, if your cost for a widget is $60 and you want to sell it for $100, it requires a mark up of 166.66%, or $60 x 166.66% = $60 x 1.6666 = $99.99999 (or simply $100).