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:

You have a product that sells for $100 per unit.

The direct costs of selling this product is $50 per unit.

Your business overheads are $350,000 per annum.

You sell 10,000 units per annum.

Your profit and loss would look as follows:

Revenue                                             $1,000,000

Less: COGS                                         $500,000

Equals: Gross Profit                             $500,000

Less: Overheads                                  $350,000

Equals: Net Profit                                $150,000

You decide to reduce your prices by 10%.  This has the effect of increasing your volume by 20%.

Your profit and loss would look as follows:

Revenue                                           $1,080,000

Less: COGS                                        $600,000

Equals: Gross Profit                           $480,000

Less: Overheads                                $350,000

Equals: Net Profit                              $130,000

Despite selling 20% more products, this has only translated to slightly more revenue $80,000 (8% increase).  More importantly your net profit has decreased by $20,000.   For the business to maintain its original net profit, it would have to increase volume by 25%.  

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

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