One of the quickest ways to adjust your profit, for good or bad, is to adjust your prices.

However, many business owners underestimate the impact that even the smallest change can have on the bottom line. For example, you may be tempted to discount your prices, hoping this will result in more sales and an increase in profits. Or you might consider increasing your prices as a way to grow your revenue.

Before reducing or increasing your prices, you must understand the impact this will have. The following tables demonstrate the impact of discounting or increasing your prices.

The Danger of Discounting

This table shows how detrimental discounting can be on the profitability of your business. More specifically, it shows how much you need to increase your sales volume by to compensate for the discount.

For example, if your gross margin is 30% and you reduce your price by 10%, you’d need to increase your sales volume by 50% to experience the same profit levels. In the eyes of a customer, a 10% discount is virtually pointless, yet the effect it has on your profitability is enormous.

Price reductionPresent gross margin
 20%25%30%35%40%45%50%55%60%
2%11%9%7%6%5%5%4%4%4%
4%25%19%15%13%11%10%9%8%7%
6%43%43%25%21%18%15%14%12%11%
8%67%47%36%30%25%22%19%17%15%
10%100%67%50%40%33%29%25%22%20%
12%150%92%67%52%43%36%32%28%25%
14%233%127%88%67%54%45%39%34%30%
16%400%178%114%84%67%55%47%41%36%
18%900%257%150%106%82%67%56%49%43%
20%*400%200%133%100%80%67%57%50%
25%**500%250%167%125%100%83%71%
30%***600%300%200%150%120%100%

The Impact of Price Increases

This table shows how increasing your prices will impact the profitability of your business. More specifically, it shows the percentage that your sales volume could reduce by before your gross margin is reduced.

For example, if your gross margin is 30% and you increase your price by 10%, your sales volume could reduce by 25% before your gross profit will reduce to a level that’s lower than it was prior to the price increase.

Price Increase Present gross margin
 20%25%30%35%40%45%50%55%60% 
2%9%7%6%5%5%4%4%4%3% 
4%17%14%12%10%9%8%7%7%6% 
6%23%19%17%15%13%12%11%10%9% 
8%29%24%21%19%17%15%14%13%12% 
10%33%29%25%22%20%18%17%15%14% 
12%38%32%29%26%23%21%19%18%17% 
14%41%36%32%29%26%24%22%20%19% 
16%44%39%35%31%29%26%24%23%21% 
18%47%42%38%34%31%29%26%25%23% 
20%50%44%40%36%33%31%29%27%25% 
25%56%50%45%42%38%36%33%31%29% 
30%60%55%50%46%43%40%38%35%33% 

Discounting can be a useful strategy…as long as you understand the numbers. Get it wrong, though, and you can lose a lot of money. The good news is that a small price increase can lead to a large increase in profits.

If you need help reviewing your pricing strategy to maximise your profits, please get in touch.

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Any questions?

If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant