#1 Price Leverage, Part 4
If you increase prices modestly (1-2%) or moderately (5-10%), how much volume could you afford to lose and still make the same profit? This is a really valuable exercise to undertake.
Here’s why: predicting volume loss precisely in the face of a price increase is really hard. (Why? There are a lot of variables that drive volume change, and we notoriously overestimate price sensitivity.) Knowing exactly where that line is can give you the confidence to pursue a price increase.
Let’s use a sample company with a gross margin of 25%:
| Price Increase | Volume Loss for Break-Even |
| 1% | 4% |
| 2% | 7% |
| 5% | 17% |
| 10% | 29% |
In plain English, this company can afford to lose almost a third of their sales volume with a 10% price increase and still break even. The goal (of course) is to lose little to no volume, and I help companies apply variable, risk-mitigated price increases to accomplish just that. The point is: even with modest volume loss, you are typically still further ahead financially.
(This is the fourth of several blog posts that dive deeper into strategic pricing tips posted on 8/14/14.)