How we make decision around our pricing policies can have significant impact on profitability. This table shows the amount of additional sales that are required to counter the potential price reduction. For example if your current gross profit margins are 20% and your pricing policy allows for a 2% discount you have to increase total sales by 11%.

What should also be considered is the working capital impact that the price discount creates. the additional revenue absorbs additional working capital which can only be funded by cash (or more debt). Keep in mind that if you increase your revenue in the above example by 11% you are not  creating more profit so your cash flow is not supported by any income statement improvement.

This table can be a great way to challenge the sales or marketing team.

You can also use Global Financial Bridge One Page Scorecard to identify the total impact on the income statement, balance sheet, cash flow and key management metrics contact Andre Gien at agien@gfbridge.com and we will show you how to revitalize your financial or board meeting for as little as $600.00

Decreasing your Prices

If Your Present Margin Is…..

                        20%    25%    30%    35%    40%    45%    50%    55%    60%

And you discount your price

by:           Your sales must INCREASE by the amount shown below to keep the same margin…

2%                  11%     9%       7%       6%       5%       5%       4%       4%       3%      

4%                  25%     19%     15%     13%     11%     10%     9%       8%       7%

6%                  43%     32%     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 table above indicates the increase in your sales that are required to compensate for a price discounting strategy. For example, if your margin is 40% and you reduce your price by 10%, you would need your sales volume to increase by 33% to maintain your profit. Rarely has such a strategy worked in the past and it’s unlikely it will work in the future!