Blog & Resources

Back to Basics: Pricing your products and services.

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
Phone +61 3 9428 1062

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