Pricing is complex, which is why we love it. But we also love those rare instances where we can use simple rules of thumb as a shortcut. We’ve been using this one for years:
By simply taking one over your GM% rate, you can find a breakpoint for your elasticity. Here’s an example:
Let’s say you’re making 20% margin on your products. The math is pretty easy: -1/20% is -5. That -5 result would have to be your elasticity if you’re maximizing your GM dollars. To bring the -5 elasticity measure to life, ask yourself the following question. If you were to take 10% off your prices, would your unit volume go up by:
- Less than 50%? Then you’re priced too low.
- About 50%? You’re about right for profit maximizing price.
- More than 50%? Then you’re priced too high.
We’ve spoken at length before about how there’s more to pricing than simple profit, but it’s always handy to have something a simple thought experiment to help guide the math.