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Kevin J Clancy - Marketing Consultant
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Hall of Fame

As Price Goes Up, Sales Go Down

Price is an area in which you just cannot guess what will happen.  There are three common relationships between price, the number of buyers, and revenue.  For example, as price moves from high to low, the number of buyers may move from low to high.  As price moves from low to high, the number of buyers may move from high to low.  Or the number of buyers may move from low to moderate and then drop.

Consider the next illustration which shows the results of a pricing study we did for one client.  We were looking at three different services for a giant home appliance company.  The company was considering three different businesses: home security systems, home energy management, and major appliance repair.  The common element was wires into the house; they could use new technology to communicate back at a central office if your house was being burglarized or on fire, if your heating/cooling system was out of whack, or if your refrigerator or washer broke down.  Three very different businesses and they wanted to understand the market’s price sensitivity.

The study found three different relationships (which makes it ideal to illustrate our point).  We found the burglar alarm concept to be very price sensitive.  As the price rose, the number of buyers fell steadily.  With the appliance repair concept, however, the relationship was exactly opposite.  Few people expressed interest in the concept at a low price, but as the price rose more and more people said they would buy.  For the home energy management concept, relative few buyers expressed interest at the low price; interest peaked at a moderate price and then declined as the price continued to rise.

This of course contradicts intuitive thinking, which is that sales rise as the price declines.  They may, but then again they may not.  In any event, depending on the original margin, they may have to rise considerably for the business to make as much as it would without the price cut.  For example, assume that our product sells for $10 and that we make $4.50 on each one (a 45 percent gross margin).  Every time we sell 4,000 units, we make $18,000.  Suppose we cut the price 5 percent; how many more do we have to sell to make the same $18,000?

The arithmetic is straightforward.  With the price cut, our widget is $9.50 and we are making $4.00 on each (a 42 percent gross margin) Now we have to sell 4,500 widgets to make $18,000.  We need a 12.5 percent increase in units to offset a 5 percent decrease in price.  

This very simple example assumes, of course, that costs remain the same, but as everyone in business knows, costs may rise or fall as volume rises.  At some point the plant has to add another shift, we need another truck to make deliveries, or more warehouse space.  Suddenly (or imperceptibly) we’re not making $4.00 on our very popular item; we’re only making $3.60 and we have to sell 5,000 widgets to make our $18,000.  That is, we’ve got to increase sales 25 percent just to stay even.

This is not abstract theory.  Business Week reported that Boeing had offered deep discounts to keep Airbus Industries from stealing customers.  “Boeing had done so well racking up orders, in fact, that it wound up with a huge production bottleneck that is costing it billions to untangle.”

We once had a product manager tell us, “I’ve really moved share.  We gained three share points in the past year.”
We asked, “What did you do?”

He said, “I dropped my price and sales started to move significantly.”

“Did they move enough to make up for the lower revenue per unit?” He looked at us blankly.  Nobody had asked that question. Everybody was just happy that sales went up. Does anybody notice there’s a problem here?  Often, they don’t.
This is especially true with promotion managers who spend their careers chasing revenues with bigger, better, bolder deals. “Buy one, get one free,” Peyton Manning says.  “Buy one large pizza and get a second for 3 bucks.”  “Use this coupon for 50 cents off.” “Buy this tablet and get a free Hunger Games cover.”

Promotions almost always increase demand and revenues and almost always reduce profitability. As a result they need to be used sparingly and with caution.

So what is our point?  The hypothesis is that as price goes up, sales go down.  Is this true?  Well sometimes.  Other times the result is precisely the opposite.

What we know for certain is that the product (with its features, benefits and perceptions), its positioning, where and how it’s sold and its price are all related.  The only way to know what the effect of price will be on demand is to test it in context.





Shocking Truths:

> There's a Negative Relationship Between What People Say They Will Do and What They Actually Do
> Quality and Price Are Positively, Linearly Related
> As Price Goes Up, Sales Go Down
> New Product Appeal and Profitability Are Not Positively Related
> Jobs-Based Segmentation Is Not a Remedy to Marketing Malpractice
> Most Brands Are Unpositioned
> Higher Levels of Customer Satisfaction and Retention Don't Always Translate Into Higher Profitability
> Net Promoter Scores Suggest That Most Companies Employ a Failed Business Strategy
> Back To The Future: How a Discredited Research Tool Discarded in the 1960s Has Become Popular in 2012
> Spending Money to Build an Emotional Connection with Your Brand Won't Build Market Share
> Most Companies Are Operating without a Vision
> Derived Importance Measures Will Lead You to the Wrong Decision
> Focus Groups May Kill Your Brand
> The Maximum Difference Methodology: a Questionable Solution in Search of a Problem
> Heavy Buyers are the Worst Target for Most Marketing Programs
> CEOs Don't Know Much About Marketing
> Advertising ROI is Negative
> Many CEOs Never Take The Time To Do It Right
> Given lots of cues and prompts, few people remember anything about your television commercial the day after they watched it
> A Dumb Way To Buy Media Is Based On The Cost Per Thousand People Exposed—CPMs
> Implementation May Be More Important Than Strategy
> Zip Codes Tell You Little About Consumers And Their Buying Behavior
> Retailers Rarely Send Truly Personalized Mailings to Individual Customers
> Too Much Talk About Brand Juice
> Marketing Plans are more Hoax than Science