The Magic Price Machine
Calculating the effects of price cuts or price increases on your breakeven point and profits.
When deciding whether to change your prices, it is a good idea to calculate the impact of the changes on your business. First you need to take account of the likely effect on the breakeven point of the business.In a competitive market reducing price rarely has the planned effect. Price cuts and promotional pricing can be highly effective in achieving the objective of increased sales and profitability, but all too often the result is a very painful surprise and disappointment. In a slow growth market competitors frequently react with price cuts of their own and the initiative can result in minimal or no sales growth, and poorer profits.
Price cutting raises the breakeven point of your business, and for any given level of sales reduces the gross margin. The first key issue is to calculate the additional sales value required to bring the business back to breakeven as a minimum requirement. If additional cost is incurred in a promotion such as advertising, which will also raise the breakeven, then the effect of this should also be calculated.
Before you decide to cut or raise your prices, put your own figures in the magic price machine to see the effect on your business. Then do it again until you are confident with the change you are planning.
