Pricing, Revenue, and Profit

Companies often lower prices to increase demand and total revenue. In many cases, the additional sales can offset the price reduction. This approach is common in highly competitive markets where businesses aim to capture a larger market share or clear inventory.

However, price decreases can harm profitability. A price reduction can have a significant impact on the per-unit profit, especially if production costs or overhead expenses remain constant. Profitability will decrease if the price reduction fails to generate sufficient sales volume to cover the lower margins.

For example, imagine a company sells a product at $50 per unit with a production cost of $30. The company currently sells 1,000 units per year.

Total revenue = Price per unit x Units sold = $50 per unit x 1,000 units = $50,000.

Profit per unit = Price per unit – Production cost per unit = $50 - $30 = $20.

Total profit = Profit per unit x Number of units sold = $20 per unit x 1,000 units = $20,000.

Let’s pretend the company thinks they can increase unit sales by 30% to 1,300 units if price is reduced to $45:

Total revenue = Price per unit x Units sold = $45 per unit x 1,300 units = $58,500.

Profit per unit = $45 - $30 = $15.

Total profit = Profit per unit x Number of units sold = $15 per unit x 1,300 units = $19,500.

The 30% increase in units sold and increase in revenue are appealing. However, because the margin per unit has decreased, profit has decreased! In addition, consider the further reductions in profit that would occur with the additional selling, general, and administration expenses the company would likely incur to sell 30% more units.

Pricing is a strategic activity (1). When pricing is done well, it creates a competitive advantage. There may be times when moving inventory through price reductions is well-advised. Often, reducing price has negative consequences. The point is to be aware of how changes in unit margins affect profit.

1. Dutta S et al. Pricing as a strategic capability. MIT Sloan Management Review, 2002; Spring:61-66. 

Disclaimer for Educational Content

The information provided on this website, through our blog, courses, webinars, or any other form of communication, is for educational purposes only and is not intended to be a substitute for professional advice. While we strive to provide accurate and up-to-date information, we make no guarantees regarding the accuracy, completeness, or effectiveness of the content.

No Financial, Legal, or Investment Advice
The content is not intended to provide financial, legal, or investment advice. Any strategies or information shared are meant for general education only and may not be suitable for your specific financial or business situation. Always consult with a licensed professional before making any decisions based on the information provided.

Not Responsible for Outcomes
The creators of this content are not responsible for any decisions or actions taken based on the information presented. By using this content, you acknowledge that any financial or business decisions are made at your own risk. We do not guarantee any specific results, including but not limited to financial success, business growth, or improved financial literacy.

Accuracy of Information
While we make every effort to ensure the information shared is accurate and reliable, we cannot guarantee that all content is free of errors. We recommend verifying any information through multiple sources or consulting with an expert before relying on it.

Third-Party Links and Resources
We may provide links to third-party websites or resources for your convenience. However, we do not endorse, control, or guarantee the accuracy of any third-party content. Accessing such resources is done at your own discretion and risk.

Limitation of Liability
In no event will the creators, owners, or affiliates of this website be held liable for any direct, indirect, incidental, special, or consequential damages arising from the use or inability to use the content provided, even if we have been advised of the possibility of such damages.

Changes to Content
We reserve the right to update or modify the content at any time without notice. Please check back periodically for updates.