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Fast Fact: Companies should not expect to take price increases without losing volume and potentially risking profitability

16 Jan 2020

Comapnies must plan for volume changes related to price changes
  • A manufacturer of fast food products (“FastCo”) was experiencing declining profitability
  • Despite having the strongest brand, FastCo faced strong competition from both within their existing product category and from adjacent substitute categories
  • Management sought to take a price increase to boost margins – without estimating the relative impact of volume losses
  • However, CVP analysis and modelled elasticity showed that their current position was one where a price increase would harm profitability even more
  • This was based on the fact that, given market analysis and a reasonable understanding of price elasticity at current volumes, the modelled volume losses from a price increase would outweigh the margin benefit of increasing price
  • In our experience, managers are often overconfident when it comes to estimating the volume impact of price increases and this can significantly harm competitiveness and profitability
  • Price should not be used to solve unrelated market issues and by seeing price as just one tool (and not the only one) to improve performance, managers can take a more holistic view of their businesses and focus efforts on the most relevant tool instead of the most convenient one

Read more about the strategic use of CVP analysis in Part 1 of our Strategy Tool on the topic.

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