December 08, 2022

Price is Not the Entire Story Here

We studied one category yesterday. Here is the relationship between change in price and change in total margin dollars, by category. Tell me what you observe?

This is very interesting.

Where does the curve peak? Right around a change in price of 1.3.

In other words, margin dollars were maximized at around a 30% increase in price.


Now look at the y-axis. Margin dollars peak at a 30% increase in price, however, margin dollars peak at about 0.92 ... an 8% margin dollar decrease vs. last year.

What does this mean?

It means that something else is going on that caused the business to fall apart. In this case, I know the answer ... this brand cut WAY BACK on marketing dollars targeting customer acquisition prospects. By cutting back on marketing spend, the business had no way to achieve optimal gross margin dollars (though the business might achieve optimal profit dollars).

But the price increases aren't, for the most part, limiting gross margin effectiveness.

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