QuickBooks 2013 For Dummies

The Second “What Happens If . . . ?” Formula

Maybe I shouldn’t tell you this, but people in finance (like me) usually have a prejudice against people in sales. And it’s not just because people who are good at sales usually make more money than people who are good at finance. It’s really not. Honest to goodness.

Here’s the prejudice: People in finance think that people in sales always want to reduce prices.

People in sales see things a bit differently. They say, in effect, “Hey, you worry too much. We’ll make up the difference in additional sales volume.” The argument is appealing: You just undercut your competitor’s prices by a healthy chunk and make less on each sale. But because you sell your stuff so cheaply, your customers will beat a path to your door.

Just for the record, I love people who are good at sales. I think that someone who is good at sales is more important than someone who is good at finance.

But that painful admission aside, I have to tell you that I see a problem with the “Cut the prices; we’ll make it up with volume” strategy. If you cut prices by a given percentage — perhaps by 10 percent — you usually need a much bigger percentage gain in revenue to break even.

The following example shows what I mean and how this strategy works. Suppose that you have a business that sells some doohickey or thingamajig. You generate $100,000 yearly in revenue and make $20,000 ...