March 21, 2023

Price / Customer Tradeoff

When you are developing categories, you likely look at your cost of goods and determine a price that (theoretically) delivers enough profit to fuel your business into the future.

On average (your mileage will vary), when prices increase, customers decrease. The goal (on the surface) is to increase sales as prices increase ... you trade off a few customers but the math all works out.

Here's what you are hoping to accomplish.

  • Last Year = 1,000 customers buying 1.4 units per customer at $50 each = $70,000.
  • Next Year =    800 customers buying 1.3 units per customer at $70 each = $72,800.
  • Sales Increase = 4%.

That's what you are hoping to accomplish.

But there is a downside.

With 200 fewer customers, you have 200 fewer customers who will buy other merchandise from other categories. This creates a feedback loop - with fewer customers available to buy from other categories, those categories struggle, you end up with too much merchandise in those categories, you have to liquidate that stuff at lower prices (which increases customer counts but at a purchasing disincentive which hurts you long-term), and profit is hurt.

In other words - be careful! As prices increase, customers decrease, leaving you with fewer customers to buy from other categories.

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