The Marketing Book 5th Edition

Competitors’

prices

Price Profit

Sales

volume

Sales

revenue

Costs

Pricing 347

particular profit driver is considered.^1 After all,
if one ‘improves’ price by raising it by 10 per
cent, surely there will be some reduction in
sales volume? And if volume is reduced, there
could also be a ‘knock-on’ effect on variable
cost – say, if any scale economies can no longer
be realized. Such concerns are well justified and
serve to highlight the definitionalnature of the
relationships in Figure 13.1. The decomposition
of profit into the four profit drivers highlights
what are essentially accountinglinks rather than
causal relationships; the latter are shown in
Figure 13.2, which explicitly considers the

indirect effects of prices on costs (via sales

volume) and also introduces competitive con-

siderations as an additional – albeit indirect –

influence on profit.

So does Figure 13.2 render Figure 13.1

obsolete? Not at all. The definitional relation-

ships in Figure 13.1 can be used to build

scenarios of the following sort: if we were to

increase price by X per cent, what would be the

acceptable decrease in sales volume to return

thesameprofit? Or, if we were to decrease price

by Y per cent, what would be the necessary

increase in sales volume to maintain the current

profit? Or, if we managed to reduce our

variable unit costs by Z per cent, what sort of

price reduction could we afford without hurt-

ing our profitability? Having computed the

answers to these questions by reference to

Figure 13.1, one can then use Figure 13.2 as a

framework for evaluating whether the expected

effects are likely to materialize in reality. For

example, if a 10 per cent price decrease requires

a 25 per cent increase in sales volume to result

in the same overall profit level (this would be

the case in the example in Table 13.1, where

variable costs are 50 per cent of the original

price), to what extent is this rise in sales volume

Figure 13.2 The road to profit

(^1) Note, however, that in many instances the assumption
of all other factors remaining constant is not as far-fetched
as it might first seem. For example, empirical research has
revealed that companies often face a situation in which
manipulation of price within certain limitsis not accom-
panied by volume fluctuations (see, for example, Skinner,
1970; Hankinson, 1985; Wied-Nebbeling, 1975, 1985; Dia-
mantopoulos and Mathews, 1993, 1995). Such situations
arise because of buyer switching costs (Buckner, 1967),
loyalty considerations (Albach, 1979) and/or ‘lazy’ com-
petitors (Wied-Nebbeling, 1975). Under such conditions
there is a clear opportunity to increase profitability by
means of (moderate) price increases withoutsacrificing
volume; given the leveraging effect of price on profit (see
Table 13.1), the resulting gains can be very substantial
indeed.