Would You Rather Increase Volume by 1 Percent or Increase Your Price by 1 Percent?
By Sean M. Hugo, CPA
In an effort to grow their business profits, every business owner asks themselves at one point: "should I increase my price or volume to grow my profits?". To answer this question, lets play a game of Would You Rather: would you rather increase volume by 1% or increase price by 1%?
Would Your Rather Increase Volume by 1% or Increase Your Price by 1 Perfect?
Let's play a game of "Would Your Rather?". Here is the scenario:
Fixed Costs= $250,000 Variable Costs = $6.5 per unit Sales = $1,000,000 Volume = 100,000 units
The scenario above would result in a profit of $10,000
Raising Volume by 1%
Now lets say increase the volume by 1%. Your fixed costs would remain constant, however your total variable costs would go up to $656,500. Sales would be $1,010,000 which equals the same price as raising the price by 1% and holding the volume steady. By raising the volume by 1% you would increase your profits by $3,500 a 3.5% increase in profit.
Raising Price by 1%
What would happen if you raised the price by 1%? Sales would be $1,010,000 an increase of $10,000. What would happen to variable costs they would remain constant ($650,000) because we just raised the price per unit and did have produce more units. Fixed costs would also remain the same. This would result in an increase in profit of $10,000 a 10% increase in profit.
Pricing correctly is the quickest and most efficient way to grow profits. The correct price will increase profits more quickly than just increasing the volume. Consider the following example.
If you would like to explore how much selecting the pricing strategy would mean to your bottom line give us a call today at 405-759-2796.