Marketing Management, 16th Edition

Initiating Price Increases

A successful price increase can raise profits considerably. If the company’s profit margin is 3 percent of sales, a 1 percent price increase will increase profits by 33 percent if sales volume is unaffected. Thus, if a company charged $10, sold 100 units, and had costs of $970, it generated a profit of $30, or 3 percent on sales. By raising its price by 10 cents (a 1 percent price increase), it could boost its profits by 33 percent, assuming the same sales volume.

A major circumstance provoking price increases is cost inflation, wherein rising costs unmatched by productivity gains squeeze profit margins and lead companies to regular rounds of price increases. Companies often raise their prices by more than the cost ...