Here’s a handy tool that could change the way you think about prices, margin and volume. It’s a margin calculator – use it to illustrate how changes in price can cut into your margins and to see the relationship between prices, margin and volume.

Here’s an excerpt from “How to Sell at Margins Higher than Your Competitors” By Bill Brooks and Larry Steinmetz that illustrates why understanding these concepts is vital for your survival as a salesperson, sales manager or business owner:

Two things salespeople who sell at premium prices learn early is that (A) if you continue to sell at a low price, your employer is eventually going to have to cut your commission rate (they have to when they start losing money) and (B) if you sell at a low price, you are going to inflict an incredible amount of work on yourself to try to maintain those (paltry) commissions.

Here’s why: Let’s say you are selling 10 units of a product at $100 per unit. The cost of goods per unit is $65 which means your margin is $35. If you raise price 10%, you have to sell only 7.8 units of this product to produce the same amount of profit. Cost of goods sold is a way of putting a dollar value on how much work you (and your employer) must do – how many orders the employer has to get, produce, fill, ship and deliver on time.

But the salesperson who cuts price by 10% has to sell 14 units to maintain the same profit margin. That means that the salesperson who cuts price has to sell 80% more in order to enable their employer to make the same amount of money it would make if the salesperson were selling at the higher price. If you’re going to go broke, why go broke tired? If you are going to have to find another job because your employer went broke, why do so much work to end up there?

Any idiot can cut price, get volume, go broke and grow tired. If you’re going to make a mistake in pricing, you always want to make that mistake on the high side. It doesn’t take nearly the work to go broke overpricing that it does to go broke underpricing.

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