What Price Cutting Means
Very few business men and a smaller percentage of salesmen, realize just what a cut in price means.
An innocent cut of 5%, most people think, does not amount to much, but yet it means that your volume must be increased 25% to make the same amount of money that would have been made if the 5% reduction had not been in effect.
10% looks innocent enough. Yet it means that a 66% increase in volume is necessary, and a cut of 15% means that the volume must be 150% greater.
Please note the following tables.
The first shown below is based on 40% added to the cost and the second table on 25% added to the cost. You will note that a 15% cut on the 40% margin calls for 110 1/2% increase in volume, whereas a 15% cut where the gross margin is 25% on the cost, calls for 400% increase:
Study the tables carefully.
Let all of those interested in selling, also study these tables.
TABLE NO. 1
Units Cost per Unit Selling Price per Unit Gross Margin on Cost Gross Profit Increase in volume Req.
100 10.00 14.00 40% 400.00
100 10.00 Less 5% 13.30 33% 330.00 21-2 / 10% or 122 Units
100 10.00 Less 10% 12.60 26% 260.00 53-9 / 10% or 154 Units
100 10.00 Less 15% 11.90 19% 190.00 110 1/2% or 211 Units
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Here you will find an entirely different proposition, because we start out with only 25% added to the cost.
TABLE No.2
Units Cost per Unit Selling Price per Unit Gross Margin on Cost Gross Profit Increase in Volume Req.
100 10.00 12.50 25% 250.00
100 10.00 Less 5% 11.87 1/2 18 3/4% 187.50 33 1/3% or 134 Units
100 10.00 Less 10% 11.25 12 1/2% 125.00 100% or 200 Units
100 10.00 Less 15% 10.62 1/2 6 1/4% 62.50 300% or 400 Units
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Study the following table carefully, because it is based on the selling price.
TABLE No. 3
Units Cost per Unit Selling Price per Unit Gross Margin on Selling Price Gross Profits Increase in Volume
100 7.50 10.00 25% 250.00
100 7.50 Less 5% 9.50 20% 200.00 25% or 125 Units
100 7.50 Less 10% 9.00 15% 150.00 66 2/3 or 167 Units
100 7.50 Less 15% 8.50 10% 100.00 150% or 250 Units
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A harmless (?) little 5% makes a whale of a difference.
It is easy to say "will allow you an extra 10%" but the above tables will tell you an important story. |
