Many industries, particularly high-technology, have products that exhibit a rapid decline in price (price erosion).  That's great for consumers, as we can often buy consumer electronics products like digital cameras, computers and cell-phones for 30%-50% off the original MSRP, twelve months after their introduction.

But, if you are the VP of Sales for a manufacturer of these products, or the components that go into these products, can your sales team make up for the price erosion with increased sales volumes?  The answer is, it depends.  In general we say no, when the cost decrease is anything higher than a single-digit value, and we'll explain why.  Then again, there is the iPod; but few products achieve that growth, or are capable of shipping 14 million units in a single quarter! 

Our Table shows the percent unit increase required to maintain flat revenue for a given percent price decrease.  A five percent price decrease in year one requires a 5% increase in volume, in year two the price decrease would require an 11 percent increase in unit volume.  That would be in addition to any existing sales quota.  The example for a 20% price decrease illustrates the futility of trying to 'make it up in volume'.  In year one it would require a 25% increase in unit volume, and year two would require a 56% increase in unit volume.  And again, remember, that is just to maintain a flat revenue.

You can create your own analysis.  Here are the calculations we used to create our Table:




Where:
U = units
R = revenue
P = price
n = years

Your ASPs may not be declining in a compound manner, but business plans and forecasts should determine, and allow for price erosion.