The one number that does not depend on a guess
Every conversation about raising a price stalls on the same question: how many customers walk. Nobody knows. What you can compute exactly is the point of indifference — the volume loss at which the higher price leaves you with the same profit as before. Above that line the rise paid off, below it you sold less for no gain.
Say the price is $100 and the variable cost is $80, which is a 20 percent margin and $20 of contribution per unit. Raise the price 10 percent to $110 and contribution goes to $30 a unit, up 50 percent. Profit holds as long as you keep two thirds of your units: 1 − ($20 ÷ $30) = 33.3 percent. You could lose a third of your customers and stand still.
The general form is break-even volume loss = price increase ÷ (margin + price increase), both as percentages of the current price. Ten points of increase on a twenty point margin is 10 ÷ 30, the same third. The thinner the margin, the more room a price rise has, which surprises people who assume it works the other way.
| Current margin | 5% rise | 10% rise | 20% rise |
|---|---|---|---|
| 10% | 33.3% | 50.0% | 66.7% |
| 20% | 20.0% | 33.3% | 50.0% |
| 30% | 14.3% | 25.0% | 40.0% |
| 50% | 9.1% | 16.7% | 28.6% |
| 70% | 6.7% | 12.5% | 22.2% |
Discounts run the same arithmetic backwards, and it is brutal
Cutting a price by 10 percent on a 30 percent margin takes contribution from 30 cents to 20 cents on the dollar. To make the same money you need to sell 50 percent more units. On a 20 percent margin, the same 10 percent discount needs double the volume. Promotions get run on the assumption that any extra traffic is good traffic, and this is the calculation that says otherwise. Enter a negative-looking scenario by putting the discounted price into the margin calculator and comparing the per-unit contribution before and after.
The demand assumption
The dropdown converts a price change into a volume change using a straight-line ratio, and that is a convenience rather than a model. Real demand does not respond in a straight line, does not respond immediately, and does not respond the same way at $9.95 as at $10.50 even though the percentage is similar. Treat the options as scenarios to look at, not predictions to rely on.
What actually informs the guess is knowledge you already have: how much of your custom is repeat, whether the item is easy to price-compare, whether the buyer is spending their own money, and what happened last time you moved. If you have last time's numbers, use the manual option and put in what really happened.
Doing it in practice
Small and frequent beats large and rare, because a 3 percent adjustment nobody notices twice a year holds a margin better than a 15 percent correction that becomes a topic of conversation. Change the composition of the offer at the same time if you can — a different size, a different bundle, something added — because a like-for-like comparison invites a like-for-like objection.
Watch what happens for a couple of months before drawing a conclusion, and watch units rather than revenue. Revenue can hold flat while your best customers quietly reduce frequency, and that is the pattern that costs you later. If it does go wrong, it is easier to reverse a price rise on one line than on the whole range, which is another argument for not doing everything at once.
Questions people ask
Why do the fixed costs not change the answer?
Because they are the same before and after. Rent does not care what you charge, so the profit change from a price rise is exactly the change in contribution — price minus variable cost, times units. The fixed cost field is there only to show the operating profit in dollars alongside, which some people find easier to hold on to than a contribution figure. Leave it at zero and every conclusion on the page is unchanged.
My supplier raised the cost. How much do I need to raise the price?
More than the cost went up, if you want to hold the margin percentage rather than the dollars. Passing on a $5 cost increase as a $5 price increase preserves the dollars per unit but shrinks the margin percentage, because the price base grew. To hold the percentage, divide the new cost by (1 minus your margin) — the target-margin mode of the margin calculator does exactly that. Whether holding the percentage or the dollars is the right goal is a judgement about your own overheads, and for most small operations holding the dollars per unit is the honest minimum.
What does the revenue-flat line mean?
It is the volume loss at which total revenue is unchanged — a lower bar than profit, and one people accidentally aim at. A 10 percent price rise holds revenue flat if you lose 9.1 percent of units, but it improves profit all the way out to a much larger loss because the units you did not sell also did not cost you anything. If you are watching a revenue dashboard after a price change, it will look flatter and scarier than the profit actually is. Watch contribution.
Does this work for a service business with no unit cost?
It works, and the answer is stark. With no variable cost, contribution equals the price, so a 10 percent rise breaks even at a 9.1 percent loss of clients and every client you keep beyond that is pure gain. The catch is that a service business usually has a capacity limit rather than a cost limit — the constraint is hours, not materials — so the real question is whether the higher price fills the same hours. If you are turning work away, the arithmetic here is not the binding one.