A 1% price rise beats a 1% volume gain

A 1% price hike beats a 1% volume gain.

The math is brutal and well-documented. For a typical large company, a 1 percent rise in average price lifts operating profit by around 8 percent, holding volume constant. The same 1 percent gain in volume lifts profit by about a third of that. A 1 percent cut in raw material cost is about two-thirds as powerful as the price rise.

Price flows directly to the bottom line. Volume drags incremental costs. Cost-cutting hits diminishing returns. None of this is new, yet Indian SMEs and family businesses consistently behave as if the opposite were true.

A real estate developer last year is the cleanest illustration I have seen.

The market was soft. Competitors were offering “stamp-duty-free” and “GST-included” discounts that, depending on the project, amounted to 4 to 6 percent price cuts. The standard playbook.

The developer was about to follow suit on a stalled mid-segment project. Instead he repositioned. He upgraded the clubhouse, added one premium amenity, repackaged the brochure, held the price.

The project sold 40 percent faster than his previous launch in the same micro-market.

Buyers had not been refusing to buy. They had been refusing to buy at the perceived value point. Lowering the price would have reinforced the cheapness signal. Holding it and visibly upgrading the value reset the equation.

I see promoters spend six months negotiating a 4 percent raw material discount with their largest supplier. The same promoters have never spent six hours analysing the price elasticity of their own product.

Before you discount, test!

The discount you negotiate from your vendor is real. The price you fail to test from your customer is invisible. And the invisible one is almost always larger.