We had several emails in response to the article last week, and each had the same question.  Can I make-up the lost profit dollars by selling more units, and if so, how many more units?  We'll explain the answer to that, but first let me reiterate an assumption that we made last week.  We used the term 'price erosion' (PE) to mean that prices decreased, while costs remained constant.

To calculate the change in units for a given decrease in price requires knowing the cost.  To be able to plot the increase in units required for a given PE, we express cost in terms of GP.  The unit increase required to make up for a 5% PE is much higher for a smaller GP, than a larger one.  Here are two examples, each with a 5% PE, but different initial costs (GP) to illustrate:

Example 1: $4.00 Price, $3.40 cost, 15%GP
(a) $4.00 Price, and $GP/unit=0.60
(b) $3.80 Price, and $GP/unit=0.40
(c) (($0.60/$0.40)-1) x 100 = a 50% increase in units

Example 2: $4.00 Price, $1.60 cost, 60%GP
(a) $4.00 Price, and $GP/unit=2.40
(b) $3.80 Price, and $GP/unit=2.20
(c) (($2.40/$2.20)-1) x 100 = a 9% increase in units

When your initial GP is low, small PE amounts will require large units increases to make up the lost profit dollars.  The graph below shows PE's of 5%, 10% and 20%.  You can read-off the values for Examples 1 and 2, by following the 5%PE curve.

NOTE: We are changing the frequency of our TechTIP from weekly, to bi-weekly.  Our next TechTIP will be published on 22 MAR.