The Demand That Price Cutting Puts Upon Business Volume

Bg Jacft Dionne

It required many years of effort to educate the lumber trade to the actual difference between GROSS and NET PROFIT.

' Lotsof them didn't understand it until too late, and they were out of business. Figuring costs was always a hard job for the lumber business.

Not one man in every one thousand realizes today the relationship that exists between cut price, business volume, and sustained profit. Most men THINK they do, but they don't.

Suppose you are trying to hold your profit to the level oflast year, whatever that may have been, or to some other certain figure.

If you decide to cut the price of your goods 5/s and still aim to make that profit, you MIGHT be inclined to think off hand, that if you cut the price 5/s, lou have only to increase your volume of sales SVo to hold the previous profit level.

And that is where you fool yourself. Some wise merchant, or auditor, has figured out a table showing exactly what the relationship is between a reduced price and the volume necessary to sustain a profit making level, and it gives you something definite to think about, and will absolutely amaze the average merchant who never would have guessed it.

Here it is:

On a 20Vo margin of profit:

A cut of SVo requires tB 2-3% more volume.

A cut olSVo requires 35%% more volume.

A cut of. llVo requires 50/o morc volume.

A cut of. l2fi/s requires 75/o more volume.

Acut of. lSVo requires ll2/o morc volume.

Which shows how remarkably difficult it is to build up a profit by reducing the price and trying to increase the volume. It CAN be done, of course, but it takes SOME volume to atone for the lost profit rate.

All of which proves hgain, that the high cost of price cutting is often even higher than we think.