Cost Effective?

Another factor to consider with the economics of reducing price to gain sales is to recover the margin lost by cutting prices. The first effect of reducing prices overall, say 3 percent, is to reduce the overall margin from 30 percent to 27 percent as soon as prices are reduced. Taking that 3 percent margin out of many businesses can be a severe blow. It requires a very large increase in sales just to overcome the effects of the margin loss. (An example of the P&L of a catalog business before and after a reduction in overall margin can be found by clicking on the chart below.)