Many business owners will reduce their prices to increase volume and hopefully revenue and profit, however, this does not necessarily lead to the results anticipated. 

Consider the following example:

Your business operates on a margin of 30%, meaning that your costs count towards 70% of your revenue.

In attempt to increase your profit you decide to reduce you sales price by 10%, hoping that sales will increase.

How much would you have to increase your sales volume to achieve the same profit as before the price decrease?  50%

Revenue:          $5,000,000

Costs:              $3,500,000        70.00%

Profit:               $1,500,000        30.00%

Drop price by 10%. Your costs will remain the same.

Revenue:          $4,500,000

Costs:              $3,500,000        77.77%

Profit:               $1,000,000        22.23%

To achieve the same profit, revenue must be increased to:

Revenue:          $6,750,000

Costs:              $3,500,000        77.77%

Profit:               $1,500,000        22.23% 

If you would like to discuss further please contact us:
McNamara & Company - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandco.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.au

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