PSU Insight

The Importance of "Running the Numbers"

Can You Make Money By Cutting Your Price?

What about the objection that even if sales rise, your profits fall? After all, although a “twofer” profit of $6 per sale is better than a “half off” profit of $3 per sale, you’re still better off making $8 per sale when you sell them at their normal retail price, aren’t you?

Well, it depends. Specifically, it depends on how much (if any) your sales increase. Although it can be calculated mathematically, you can do it without a formula by just running some numbers.

Let’s run the numbers on the half-price offer first. It might seem obvious that if you’re selling your CDs at half-price, you need to double your sales to achieve the same profit.

By this point, I hope you have begun to become suspicious of the “obvious” answer.

Let’s run the numbers. Let’s say that you normally sell 100 of your CDs at a speaking engagement. At $8 profit apiece (for sales at your normal retail price), you make a total of $800.

If you cut your price in half and double your sales, what happens? Granted, you sell 200 CDs instead of 100 CDs. But you sell the CDs at $5 each instead of $10… yet your production cost ($2) remains the same. You make a profit of $3 on each CD, so you make $600 on the total sales — as opposed to your normal $800.

Bottom line — if you sell your CDs at half price and you double your sales, you lose $200.

We can look at the problem another way by asking the question, “How many CDs do you need to sell at $3 each (your profit at half-price) to reach $800?”

You can figure this out by dividing $800 (the profit you want to make) by $3 (the profit you’re making on an individual sale). Whip out your calculator and you’ll see that you need to sell 266 CDs at $3 each to make the same money as selling them at $6 each. Or putting it another way, because you’re cutting your price in half, you need to increase your sales by 166% — not merely doubling your sales like you might expect!

Now let’s consider the buy-one-get-one-free offer. As before, let’s say that you normally sell 100 CDs at a speaking engagement. At $8 profit apiece, you make a total of $800.

But if you have a ‘buy one, get one free’ promotion and you double your sales, you have 200 sales (at $6 profit per sale). That’s a profit of $1200, as compared to the normal $800.

Bottom line — in this example, if a ‘twofer’ promotion doubles your sales, you get a 50% increase in profits!

As before, you can look at the problem another way by asking the question “So how many CDs do I need to sell at $6 each to reach $800?”

You can figure this out by dividing $800 by $6. Using your calculator, you’ll see that you need to sell 133 CDs at $6 each to make the same money that you’d make by selling 100 CDs at $8 each.

(You can even figure this out without resorting to dividing 800 by 6, simply by guessing. You obviously need to sell more than 100 CDs, so let’s try 110 — 110 CDs at $6 equals $660. Not enough, so guess again. Let’s try 120 — 120 CDs at $6 each equals $720. Still not there, but getting closer. Let’s try 130 — 130 CDs at $6 each equals $780. That’s close enough to $800 to answer our question. So your guesstimate, without using a calculator, is “selling slightly more than 130 CDs is my breakeven point.”)

So in this example, as long as you increase sales by about 30% (33.33% for you anal-retentive types), you’re making the same profit with your “twofer” sale as you do when you sell CDs at their normal retail price.