Price Changes and Sales Volume
Price Changes and Sales Volume
Any proposed change in the price of branded products must obviously be given very careful consideration before a decision is reached. It is here that the ONLINE MARKETING Manager can use his Market Research Department to good effect. Research should be able to show him the results of previous price changes upon the market share both of his own firm and that of his competitors. To some extent, also, Market Research should be able to provide information on the likely attitude of consumers to a change of price. This can, if necessary, be further assessed by means of a test ONLINE MARKETING of the product at the new price.
A major consideration for a manufacturer contemplating a price change is the amount of change in the volume of his sales which he can absorb without his having to alter the contribution level of the product. He will need to know, reasonably accurately, how much additional business he must collect at the reduced price to avoid an alteration to the contribution level.
On the assumption that one possesses sufficient production capacity to absorb the additional business, a simple calculation will indicate how much change in brand contribution will occur.
Let us assume that the current sales volume of the product is 1,200,000 units and that the present price is 30p per unit. If the variable cost per unit is 16p then the contribution to fixed costs and profit being made by this particular product will be �168,000.
To find the new sales volume figure which the product must achieve in order to maintain the same contribution to fixed costs and overheads, one divides the current contribution figure by the proposed new unit price less the variable cost per unit, thus:
Current contribution = 1,050,000
From this calculation it will be seen that, as a result of increasing the selling price by 2p per unit, one can accept a reduction in sales volume of 150,000 units without reducing the contribution this particular product makes to the firm's overheads and profits.
Conversely, however, if we reduce the price of the product by 2p per unit, that is to say from 30p to 28p per unit, and calculate by the same method, we shall arrive at the new sales volume figure which it will be necessary to achieve to keep the contribution figure constant.
Current contribution �168,000
(0�28 - �0�16) =
Thus, sales will have to be increased from 1,200,000 units to 1,400,000 in order to absorb the effect of the reduction in price.
For products which are sold by the packet as distinct from those sold by weight, some manufacturers achieve the equivalent of a price increase by reducing the size of the package and thus the weight of the contents. However, it should be remembered that the use of a small packet can increase the variable cost per unit of the package and this could cancel out the advantage one might hope to achieve by selling its reduced contents at an unchanged price.
One frequently finds that in consumer markets there is a large manufacturer who has achieved a dominant position by acquiring the major share of the business. Such a company is recognized as the market leader. It is able to initiate its own pricing policy and generally the rest of the market will follow its lead. Generally, smaller producers are prepared to 'toe the line' in this manner because, unless their products possess special, unique features, they cannot hope to sell above the price charged by the market leader: conversely, to sell very much below the leader's price and thus threaten his market share would be to invite his swift reaction which could result in their going out of business. This does not necessarily mean that a market leader will refuse to tolerate some price variation on the part of his smaller competitors. As we saw in an earlier webpage, many small producers not only survive but prosper by limiting their activities to specialized sectors of a market and thus avoid any embarrassing entanglement of interests with their much larger competitors.
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