The arithmetic of price: why a small discount needs a lot more sales
Cutting prices to win work feels safe. On a 30% gross margin, a 10% discount needs 50% more sales just to stand still. The numbers, and how to raise prices well.
A price change goes straight to the bottom line, because the cost of what you sell does not change with it. That makes discounts expensive and price rises powerful, more than most owners expect.
Gross profit per sale falls from 30p in the pound to 20p after a 10% cut, so you need half as many sales again.
Show the data
| 2.5% cut | 9.1% |
|---|---|
| 5% cut | 20% |
| 10% cut | 50% |
| 15% cut | 100% |
The other direction
Raise prices by 5% on the same 30% margin, and gross profit per sale rises from 30p to 35p in the pound. You could lose one sale in seven and make the same gross profit, with less work. In practice, most businesses lose far fewer customers than they fear.
Raising prices well
- Review prices every year, on a date customers come to expect.
- Explain the reason: wages, materials, energy, or more value delivered.
- Give notice, and honour quotes already given.
- Look at the customers who complain least about price: they show what you are worth.
The figures assume costs per sale do not change with volume. In real businesses, extra volume usually brings extra overheads too, which makes discounting look even worse.
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This insight is general information, not advice for your circumstances. Talk to us before acting on it.