The Marketing Book 5th Edition

Profit

Variable unit cost

Sales revenue Total costs

Sales volume Price Variable costs Fixed costs

Sales volume

(–)

(×) (+)

(×)

346 The Marketing Book

Given the four drivers of profit, an impor-
tant question concerns their relativeimportance.
In other words, assuming that all other factors
remain constant, what is the effect on profit of
‘improving’ each driver by a certain amount?
Clearly, the notion of ‘improvement’ is different
for the revenue and cost sides, i.e. an improve-
ment in price and sales volume refers to an
increasefrom existing levels, while an improve-
ment in variable and/or fixed cost refers to a
reductionfrom current levels.
Table 13.1 shows the differential impact on
profit of a 10 per cent improvement in each

profit driver; it is clear that by far the greatest

‘leverage’ effect on profit comes from improv-

ing price. This is not an accident reflecting

either the specific improvement considered (i.e.

10 per cent) or the particular starting values in

Table 13.1; experimentation with different fig-

ures will not fail to demonstrate that ‘price

drives profit like no other factor’ (Dolan and

Simon, 1996, p. 24).

At this stage, the reader may be getting a

bit uncomfortable – and rightly so – with the

simplifying assumption that ‘all other factors

remain constant’ when the profit impact of a

Figure 13.1 The determinants of profit

Table 13.1 Effects on profit of a 10 per cent improvement

Before After

Profit (£)

Before After

Profit

improvement

(%)

Price (£) 100 110 30 000 40 000 33.3

Sales Volume 1000 1100 30 000 35 000 16.7

Variable Unit Cost (£) 50 45 30 000 35 000 16.7

Fixed Cost (£) 20 000 18 000 30 000 32 000 6.7