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    Grovg

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    RohanMohapatra
    Upon making any marketing decision that involves price changes, such as discounts or changing product features, firms should perform a profitability analysis to understand how these decisions will impact financial performance. To do a profitability analysis, firms must understand the relationship between price and demand by plotting a demand curve based on known price-demand data points. The demand curve shows the probable demand for any given price. Elasticity of demand measures how much demand changes with price changes and indicates whether demand is elastic or inelastic. Firms can use the demand curve and elasticity to help determine optimal pricing and identify opportunities to shift demand. Profit is calculated by taking revenues and subtracting variable and total costs.

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    Grovg

    Uploaded by

    RohanMohapatra
    28 views2 pages
    Upon making any marketing decision that involves price changes, such as discounts or changing product features, firms should perform a profitability analysis to understand how these decisions will impact financial performance. To do a profitability analysis, firms must understand the relationship between price and demand by plotting a demand curve based on known price-demand data points. The demand curve shows the probable demand for any given price. Elasticity of demand measures how much demand changes with price changes and indicates whether demand is elastic or inelastic. Firms can use the demand curve and elasticity to help determine optimal pricing and identify opportunities to shift demand. Profit is calculated by taking revenues and subtracting variable and total costs.

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    Upon making any marketing decision that involves price changes, such as discounts or changing product features, firms should perform a profitability analysis to understand how these decisions will impact financial performance. To do a profitability analysis, firms must understand the relationship between price and demand by plotting a demand curve based on known price-demand data points. The demand curve shows the probable demand for any given price. Elasticity of demand measures how much demand changes with price changes and indicates whether demand is elastic or inelastic. Firms can use the demand curve and elasticity to help determine optimal pricing and identify opportunities to shift demand. Profit is calculated by taking revenues and subtracting variable and total costs.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    28 views2 pages

    Grovg

    Uploaded by

    RohanMohapatra
    Upon making any marketing decision that involves price changes, such as discounts or changing product features, firms should perform a profitability analysis to understand how these decisions will impact financial performance. To do a profitability analysis, firms must understand the relationship between price and demand by plotting a demand curve based on known price-demand data points. The demand curve shows the probable demand for any given price. Elasticity of demand measures how much demand changes with price changes and indicates whether demand is elastic or inelastic. Firms can use the demand curve and elasticity to help determine optimal pricing and identify opportunities to shift demand. Profit is calculated by taking revenues and subtracting variable and total costs.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Upon making any marketing decision will have an implication on firm’s financial performance.

    Specifically, the pricing changes will have direct impact on the firm’s financials. Hence, for
    marketing moves that involves price change - such as discounts & offers, marketing campaigns,
    change in product features, changing wholesaler price, and choosing a target segment -
    profitability analysis should be done.

    To perform profitability analysis, it becomes imperative to understand the relation between price
    and demand and certain metrics.

    Demand Curve

    Price and demand usually have an inverse relation. Upon decrease in price we see that the
    demand increase to an extent. Plotting a demand curve will help us determine probable demand
    for any given price point in the curve.

    Demand curve can be plotted upon knowing two price points and their respective demands,
    along with the assumption that the demand is linear. The demand curve is a representation of all
    possible demands and their prices a product could possibly have.

    Initially the slope is determined by using the below formula

    Slope = difference between prices/difference between demands.

    Using slope and one point with its respective demand, Y intercept can be calculated. With slope
    and Y intercept, equation for demand curve can be found

    Y=mx+C (where m is slope, x is price, Y is demanded quantity and C is Y intercept)

    Elasticity of Demand

    For a given percentage of price change, the resulting percentage change in demand is called the
    elasticity of demand. Demand may be elastic or inelastic.

    Price elasticity of demand = % change in demand quantity/% change in price

    Inelastic demand curve has a steeper slope, indicating that a large reduction in price will only
    lead to small increase in demand. It is vice versa for elastic demand.
    Demand curve and Elasticity of demand can be used by marketers to understand which kind of
    demand will be generated for a given price. Also, in the demand curve, different price points
    exhibit different price elasticity of demand.

    Marketers can also aspire to shit demand curve outwards using a number of marketing activities,
    so that demand increases at constant price. Demand curve can also turn inward when better value
    is offered by competitors.

    Elasticity Ratio Type of elasticity


    E=∞ Perfectly Elastic
    1<E<∞ Relatively Elastic
    E=1 Unit Elastic
    0<E<1 Relatively Inelastic
    E=0 Perfectly Inelastic

    The upper limit of pricing a product is set by demand curve and the lower limit is set by the cost
    incurred to produce the product.

    Calculating Profit

    Profit or contribution is calculated using revenues and costs (includes fixed and variable cost).
    There are four metrics that are used frequently namely contribution margin, gross margin,
    directing marketing contribution, and net income.

    Contribution Margin = Total revenue – (Variable Cost per unit*Quantity sold)

    Gross Margin = Total revenue – Cost of goods sold (includes some fixed costs)

    Direct Margin Contribution = Total revenue – (VC per unit* Quantity) – Marketing expense

    Net Income = Total revenue – Total costs

    Similar to this a retailer calculates his profit, which is the difference between retail selling price
    and cost to retailer.

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