How An Increase or Decrease in Price Affects Gross Margin and Sales
Calculate the impact of a price increase or price decrease
Bonus: Formula for impact of sales change. Scroll down to download your own Microsoft Excel workbook with the formulas for a price increase/price decrease and gross profit.
If you want to increase gross margin with an increase in sale price, you probably should to know how gross profit is calculated. And, assuming a drop in sales, how much of a sales increase do you need to maintain the same gross margin?
On the other hand, if you’re considering having a sale, you may want to know the percent sales increase needed to maintain the same gross profit. This is important to know how sales can decrease (for a price increase) or go up (for a price cut) for gross margin dollars to remain the same.
We show all the calculations on how a price increase/decrease affects gross margin vs. sales, and we look at the formula for the impact of sales change.
Gross margin: Price increase without cost increase
Let’s look at an increase in selling price and gross profit margin. How much can sales drop and keep gross margin 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 margin in the chart below, in our gross margin Excel or Google Sheets 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.
For example, if you currently have a 30% gross margin (middle column), and you are considering a 10% price increase (second row), sales can drop by 25% and you will still have the same total gross margin dollars in the end.
You’d have to determine if the price elasticity in your market would allow you to have a 10% price increase. You’d also have to predict how you competitors would respond. In today’s economy, many owners and managers are looking for ways to increase revenue and keep up with inflation, and this is one option to consider.
Another pricing strategy is to look at slower moving or replacement items as opportunities to increase prices, while keeping your best selling items competitively priced.
Increase sale price, decrease in sales volume, impact on gross profit dollars:
| At this gross margin (%) sales can decrease by: | ||||
| Price increase (%) ↓ | +20% gm | +30% gm | +45% gm | +50% gm |
| 5% | -20% | -14% | -10% | -9% |
| 10% | -33% | -25% | -18% | -17% |
| 15% | -43% | -33% | -25% | -23% |
| 20% | -50% | -40% | -31% | -29% |
Lowering prices to increase sales: Total sales needed
If you’re lowering prices to increase sales, how much do sales have to go up to keep your 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 or Google Sheets spreadsheet illustration below.
Price decrease vs. sales
Find the gross margin of your product in the second row, then find the row that shows your price cut (left column). Where the two numbers intersect is a number that shows how much sales volume has to go up as a result of a price decrease to maintain the same gross margin dollars.
For example, if you have a 30% margin (middle column), and you are considering a 10% price decrease (second row), you must have a whopping 50% sales increase to end up with the same total gross margin 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.
Decrease sale price, required sales to maintain gross margin dollars:
| At this gross margin (%) sales must increase by: | ||||
| Price cut (%) ↓ | 20% gm | 30% gm | 45% gm | 50% gm |
| 5% | +33% | +2% | +13% | +11% |
| 10% | +100% | +50% | +29% | +25% |
| 15% | +300% | +100% | +50% | +43% |
| 20% | N/A | +200% | +80% | +67% |
As you can see, the free market blesses those with high margin. A decrease in selling price will probably increase total 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 sales 200%) to have the same gross profit dollars. Keep this in mind if you’re lowering prices to increase sales.
How to calculate a percentage increase or decrease in Excel or Google Sheets
Click to download. Open as “read only.”
Now you can download your very own Microsoft Excel workbook to calculate this yourself. If you download this, depending on your browser, you’ll probably be given an option to open the spreadsheet as read-only.
Download the Excel file here. Adapt it for Google Sheets.
We replicated both “spreadsheets” illustrated above, showing the effect of price decreases or increases and how many more or fewer unit sales would be required to maintain the same gross margin dollars.
We also have a spot where you can enter your own current gross margin percentage and a change to the selling price, and the spreadsheet will show you how many unit sales would be required to keep your current gross margin dollars/gross profit dollars. Please note that this spreadsheet does not calculate gross margin percentage, that is something else completely. You must however, need to know your current gross margin to enter in the spreadsheet.
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.
Another way to look at it is this gross margin formula: Gross Margin = (Revenue – Cost of Goods Sold) / Revenue.
Gross margin is used to calculate GMROI.
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.
Gross margin or mark up?
Note 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.
Looking for strategy? Read our article on creating your aftermarket brand strategy.
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Great info – do you have the equation that helped you derive the table.
Also I wanted to point out that in the text above you said you would need to double your unit sales with a 30% profit margin and a 20% decrease. Wouldn’t it actually be tripling your unit sales since 200% is 3x your original amount (like a 100% increase is 2x your current amount)?
Thanks for pointing that out. We’ve updated the article.
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