Calculate the impact of price increase on gross profit
If you want to increase gross margin with an increase in sale price, you need to know how gross profit is calculated. Assuming a drop in unit sales, how many unit sales are needed to maintain the same gross profit?
On the other hand if you’re considering a promotional sale event, you should know how many additional unit sales are needed to maintain the same gross profit. You need to know how total unit sales can drop (for a price increase) or need to increase (for a price decrease) for gross profit dollars to remain the same.
We show all the calculations on how a price increase/decrease affects gross profit vs. unit sales.
Gross profit: An increase in selling price without increase in cost
Let’s look at an increase in sale price and gross profit margin. How many fewer units can you sell and keep gross profit dollars the same? This is the same as calculating an increase in selling price without an increase in cost.
We’ve calculated the impact of an increase in sale price and profit in the chart below, in our gross profit Excel spreadsheet illustration. Find the current gross margin of your product in the left column, then find the column that shows your price increase. Where the two numbers intersect you’ll see how many fewer units are required for you to sell and maintain the same gross profit dollars.
What happens with an increase in sales price? 40% #grossmargin, 10% price increase = 20% fewer units to have the same #grossprofit dollars Click To TweetFor example, if you currently have a 40% gross margin, and you are considering a 10% price increase, you can sell 20% fewer units and you will still have the same total gross profit dollars in the end.
You’d have to determine if the price elasticity in your market, or your competition, would allow you to have a 10% price increase. In today’s economy many owners and managers are looking for ways to increase revenue and this is one option to consider. You can also look at slower moving items or replacement items as opportunities to increase prices, while keeping your best selling items competitively priced.
With an increase in sale price, how much can unit sales decrease and maintain the same gross profit dollars?
|Price Increase Percentage|
|Margin, before price increase||+5%||+10%||+15%||+20%|
|30% gross margin||-14%||-25%||-33%||-40%|
|35% gross margin||-13%||-22%||-30%||-36%|
|40% gross margin||-11%||-20%||-27%||-33%|
|45% gross margin||-10%||-18%||-25%||-31%|
|50% gross margin||-9%||-17%||-23%||-29%|
How to find gross profit, with a decrease in sale price and total unit sales
With a decrease in sale price (a promotional sale or discount coupons, for example), how many more units do you have to sell to keep gross profit dollars the same? A decrease in selling price will probably increase your unit sales. So, what happens if you’re lowering prices to increase unit sales? We’ve calculated the impact of decrease in sale price on profit, in the Excel spreadsheet illustration below.
Find the gross margin of your product in the left column, then find the column that shows your price decrease. Where the two numbers intersect is a number that shows how many more units you have to sell as a result of a price decrease to maintain the same gross profit dollars.
For example, if you have a 35% margin, and you are considering a 10% price decrease, you must have a whopping 40% increase in unit sales to end up with the same total gross profit dollars. This is important to know if you are considering a sale in an attempt to increase unit sales of a product, especially if it has a low gross margin to begin with.
If you decrease your prices, how much must unit sales increase to maintain the same gross profit dollars?
|Price Decrease Percentage|
|Margin, before price decrease||-5%||-10%||-15%||-20%|
|30% gross margin||+20%||+50%||+100%||+200%|
|35% gross margin||+17%||+40%||+75%||+133%|
|40% gross margin||+14%||+33%||+60%||+100%|
|45% gross margin||+13%||+29%||+50%||+80%|
|50% gross margin||+11%||+25%||+43%||+67%|
As you can see, the free market blesses those with high margin. A decrease in selling price will probably increase unit sales. But, if you have a thin 30% gross margin and you drop your prices 20%, you must triple your unit sales (i.e., increase unit sales 200%) to have the same gross profit dollars. Keep this in mind if you’re lowering prices to increase sales.
Need to know how to find gross margin? Here’s how to calculate gross margin in Excel
The examples above assume you know how to find gross margin. In case you don’t know how to find gross margin, here’s the calculation. If you sell a widget for $100, and you had to pay $60 for it, your “cost of goods” is 60%, “gross margin” is 40% and you produce $40 in “gross profit dollars.” This is usually just called “gross profit.”
Here’s an example to calculate gross profit. Let’s say you sell a product for $125.95 and your cost is $83.00. That means you generate $42.45 in gross profit for each product sold. $125.95 – $83.00 = $42.95 gross profit. So, $42.95 / $125.95 = 0.341 = 34.1% gross margin.
I found the formula to calculate gross margin in Excel! #GrossMargin = (Revenue – Cost of Goods Sold) / Revenue Click To TweetAnother way to look at it is this gross margin formula: Gross Margin = (Revenue – Cost of Goods Sold) / Revenue.
Gross margin can be reported on a single unit, or it can be reported on for an entire company. Gross margin for a company would be that company’s total sales, minus cost of goods sold, and divided by the total company sales revenue. In this case gross margin is usually expressed as a percentage.
If you want to reach a specific gross margin and you know the cost, the Excel formula is: (Cost of Goods) / 1 – (Gross Margin %) = (Selling Price).
In other words, if you pay $60 for a widget and want a 40% gross margin, subtract 40% from 1 to get .6, so $60 / 0.6 = $100 selling price.
Here’s an example using the same numbers as above. Let’s say your cost on a product is $83.00 and you want to make a 34.1% gross margin. Subtract 0.341 from 1 to get .659, and $83.00 / .659 = $125.95.
Calculate gross margin or mark up?
I found the formula to calculate mark up! Markup Percentage = #GrossProfit Margin/Unit Cost Click To TweetNote that mark up and gross margin are two different things. “Mark up” defines how much you’re going to add on to a product cost to reach a selling price. “Gross margin” defines how much you make in gross profit at a specific selling price.
As an example of mark up, if your cost for a widget is $60 and you want to sell it for $100, it requires a mark up of 166.66%, or $60 x 166.66% = $60 x 1.6666 = $99.99999 (or simply $100).
For more information see our related article on the Turn/Earn Index.
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