Smarter Pricing: How to capture more value in your market

Volume increases rarely match the original profit foregone

A small price reduction has a disproportionate impact on profit.

Figure 8.2. The cost of a price cut. For a typical firm, with average variable and fixed costs, a price cut of 1 percent from 100 cents to 99 cents, reduces profit by 12.3 percent.

With a straightforward price cut of 5 percent, typically an increase in volume of 18–20 percent is needed to recover operating profit. And remember that a sudden expansion in volume will have ramifications for the variable costs of warehousing, inventory and delivery, let alone advertising costs to communicate the cut. Volume surges on this ...