The Effects of Price Increase on Sales Volume

Business owners raise company prices or individual product or service prices for various reasons. In some cases, price increases relate to a strategic plan of becoming a higher-quality brand. Other times, increases result from higher costs that the business passes on to customers. As a business owner, you need to weigh the potential implications a price increase can have on sales volume.

The law of demand indicates that under normal circumstances, demand for a good increases with a price decline, and decreases with price appreciation. Simply put, if you sell 100 units of a widget in a month at $10 per widget, you can expect to sell fewer than 100 the next month if you raise the price to $12.50 per widget.

The relative change in sales volume isn't the only economic consideration in a price change. If the relative change in demand pales in comparison to the benefit of increase revenue per unit, the price change makes economic sense. If you sold 100 units last month at $10, you generated $1,000 in revenue. If your cost was $7.50, your profit was $2.50 per unit, or $250. If you sell 90 units at $12.50 the next month, your revenue is $1,125. Assuming the same cost basis, your profit is $375, despite the price increase and volume drop.

Also consider the correlation buyers make between quality and price. In general, consumers assume a higher price relates to a higher-quality product. Raising prices to coincide with effective product development and promotional branding may actually improve your sales volume in higher-income market segments. If you raise prices without effective improvements or promotion, though, the typical law of demand results will likely apply.

The effects of price increases depend on their timing. Raising prices when goods are in greater demand can increase revenue without much adverse affect on volume. When buying seasonal goods, such as Christmas decor or back-to-school products, shoppers typically have less concern with price than they do availability or quality. Some retailers raise prices or sell higher-priced merchandised at such points. In more typical shopping periods or after demand wanes, a price increase will likely get noticed more easily by budget-conscious customers.