Chapter 2 – Profit Sensitivity

Price – the primary tool used strategically to capture customers on an “Instantaneous” manner
Discount – reduction of price for various purposes usually for promotion

Weighing Scale Principle Volume Hurdle

Profit Depends on Quantities Sold
Quantity Sold Depends on Price
Price Changes Directly Affects Profit

Volume Hurdles – Volume Hurdles will justify if a change in price regardless of its up or down will be a
good for profit
 There is a corresponding increase in quantity needed if you will perform price cuts
 There will be a decrease in quantity of sales that will occur in price hike

Requisites of Volume Hurdle:

Any Price Change regardless if it is to increase or decrease needs to improve profits
Changing Price should never have adverse effects on profitability
 Higher Prices always leads to fewer purchases
 Lower Prices leads to more purchases

Profit Sensitivity Analysis

Demonstrates mathematically the impact of price change in profit
Establishes the linear relationship between profits and prices
Economic Price Optimization
Method of Identifying the best price possible for profit maximization
Requires in part the measurement of demand elasticity
Challenges in Price Adjustments
Field Executives (Sales Agents/Account Officers) – Always want more discounts
Centralized Executives (Desk Boss/Office Based Officers) – Always want higher prices
There is disparity abound with regards to the motives of both parties
Executives always want to control

 When there is a small change in price and it affects the quantities sold in a large way, then it is
said the market is ELASTIC
o ELASTIC GOODS – goods where if the price goes up, people will stop buying or greatly
reduce demand of a particular product and if the price goes down, people will greatly
increase demand of a particular good
 When there is a large change in price and it affects the quantities sold in a small way, then it is
said that the market is INELASTIC
o INELASTIC GOOD – goods where if the price goes up, people will only slightly reduce
demand of a particular product; and if the price goes down, people will only slightly
increase demand of a particular good

EXCESSIVE PRICE REDUCTION

- Increase inflation
- Increases per capita debt
- Creates an artificial surge of national cash flow creating a fake sense of prosperity