The marketing relationship of costs and sales volume as profits helps a business to examine selling prices, sales, production volumes, expenses, costs and profits. This analysis provides the business with useful information that the it can use for decision-making processes. Specifically regarding the pricing element in a marketing strategy, the business should look to find the right balance between costs, sales and profits.
When a business prices a product, it will need to incorporate how much the product costs to produce, the anticipated sales of the product and how much profit that business would like to make selling the product. Considering these factors allows the business to calculate a reasonable and realistic price for the product. Additionally, when considering the cost element of the pricing model, the business should always evaluate overhead costs. Overhead costs are a type of fixed cost and include costs such as rent of the warehouse space, the price of utilities and interest payments on loans.
The demand for a product will greatly influence the sales volume of the product. The basic pricing strategy for a product attempts to maximize sales volume and profit. This requires the business to find the right price that will allow the product to sell while allowing the business to adequately profit from the sale. Under a basic pricing strategy, if the sales volume of a product is too low, the business will generally lower the price point to increase sales. This will, however, also result in a reduced profit on the item for the business. In many cases, lowering the price of a product will result in a higher sales volume.
When looking at the pricing element of the marketing strategy, the business should also carefully consider a realistic profit number that the business wants to make on the product. Generally, a higher profit point will mean a higher selling price for the product. However, by raising the selling price to increase profit, the business will generally adversely affect the demand for the product. On the other hand, lowering the price point of an item will generally lower the profit for the item but will increase the demand for the product.
The CVP-model is a mathematical model that allows a business to conduct a thorough cost-volume-profit analysis. Regarding costs, the CVP model helps the business to evaluate the effects of cost on changes in volume. The purpose of this type of analysis is to evaluate the profits earned and the costs incurred. For example, if a business wants to buy new equipment to increase production levels, the new machine may increase the fixed costs. A business can use CVP analysis to calculate the reduction in variable costs necessary to maintain the same overall cost for a product.