PSU Insight

The Importance of "Running the Numbers"

Delving Deeper Into Pricing Strategies

Let’s summarize what we’ve determined in the example used in the preceding sessions. In this example....

  • If you sell your CDs at half-off, you need to increase your sales by 166%, or almost triple your sales at normal retail, in order to keep your profits at the same level.
  • If you sell your CDs as “twofers” — buy one, get the second free — you need to increase your sales by only 33% to maintain your profit level.

Right there, it’s apparent that selling CDs as “twofers” beats selling them at half-price. (Using these numbers, of course.)

But should you sell them as twofers at all? Why not sell them at their retail price and make more money? It’s not “obvious”, but if your sales increase by more than 33%, you’re actually making more money by giving some product away! (For example, we saw earlier that if you double your sales using twofers, you increase your profits by 50%.)

Now it might seem that if sales increase by less than 30%, you’re making less money and you shouldn’t do it. It’s “obvious.” But even that analysis ignores an important factor — inventory reduction.