SEARCH, INDEX, UPDATES, CONTENTS, IDEAS, PRICING POLICY
Economists use phrases such as "perfect market" and "elastic demand". Market Traders know that reducing the price generally increases the volume of sales, but that each product has a different value to every potential customer.
Pricing policy will normally be set with the aim of generating the greatest profit. This will depend on the stock available and the overheads incurred during the period over which it is sold.
Buying and selling are human activities, affected by emotional thought, and not an arithmetic exercise. However in predicting how people will react to price rises, it is helpful to do some calculations to show the effect of proposed price changes.
The formula for Critical Volume Loss (CVL) is -
| 100 x a |
| a + b |
The formula for Critical Volume Gain (CVG) is -
| 100 x a |
| a - b |
Key - a = percentage change in price, b = present percentage gross profit margin.
This is best illustrated with examples. When put into a real context, they can help make decisions.
If goods which are currently being sold at £4 have a cost of £3, the gross profit margin is £1 and 25% of the sales value.
If the price of the product is raised by 20%, profits will not fall until
sales drop by more than 44%(CVL)
(100 x 20 = 2000, 20 + 25 = 45, 2000 / 45 = 44.4).
Knowing the market, you can decide whether a 20% increase in price is likely to cause a 44% decrease in sales. It could well be a viable strategy.
If the price of the product is reduced by 20%, profits will not be
maintained until
sales increase by more than 400%(CVG)
(100 x 20 = 2000, 25 - 20 = 5, 2000 / 5 = 400).
Knowing the market, you can decide whether a 20% reduction in price is likely to cause a 400% increase in sales. It is unlikely to be a viable strategy.
Try some calculations with a range of products from your own business.
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