The dynamics of pricing is extremely important to understand, before you start raising or lowering the price of your product or service. Pricing is a powerful tool, perhaps the most powerful tool that will have direct impact on you position in the market, the demand of your product or service and not at least your financials. Yet working with pricing can be relatively complex, more complex than you immediately might think, hence it is important to think things through before proceeding with realizing your price changes.
Impact on demand is one important aspect to consider, but there are other
In this brief post we will only be covering the fundamental dynamics of pricing: the price changes impact on the demand for your product or service. Or rather the impact on demand your planned price change need to have in order for you to proceed with your plans, i.e. what you need to believe in before executing on your plans.
There are of course other aspects that you might want to consider before proceeding with your price changes, e.g. impact on brand, channel implications, implication on competitors etc.
This is what you need to believe in if you are considering a price increase
Table describe how much quantity sold of your product/service need to increase in order to reach break-even on contributed profit given the profit margin of your product / service. This means as an example, in order to motivate a 10% price reduction for a product with 60% margin you need to believe that quantity sold will increase with at least 20%.
This is what you need to believe in if you are considering a price decrease
Table show the maximum reduction in sold quantity that you can afford in order to sustain same total profit from a product/service when increasing its price. As an example, in order to motivate a 10% increase of a product with 60% margin you need to believe that quantity sold is reduced with less that 14%, otherwise price increase is not motivated.