Profit and Profitability Tools

Understanding the sensitivity of profit to variations of prices and costs is essential for any business. The sensitivity is determined by the indicator of profit in % of sales, also called profitability rate, and it can be measured in percentage points.

This knowledge of profit can help answering many questions, to name a few:

→ What is the necessary price increase to guarantee the profit growth by X percentage points? Should this increase be the same for all products of a portfolio?

→ How will the profit of a product react to variations of costs? If material cost increases by X % for products with different profitability, will the impact on profit be the same?

Read more about indicators of profit and profit sensitivity in our article - “How (Not) to Lose a Profit in 10 days”.

Here we introduce our profitability calculators (online) and profit simulation tools (Excel) to help you search for profit maximization, plan profitable sales promotions and negotiate selling conditions with your clients. You can quickly estimate how sensitive is your profit to variations of prices and costs, and make necessary adjustments to secure the desired level of profit.

Online profitability calculators:

  1. To calculate the impact of price and cost changes on profitability rate (gross profit/gross margin in % of net sales).

  2. To calculate the impact of price discounts on profitability rate and the volume growth necessary to compensate the price reduction.

The example of use and the interpretation of the results for each of the calculators are provided below.

Impact of Price and Cost Variations on Profitability

Example:

Given the current profit 40% (of net sales), if the price increases by 10% and cost increases by 5%, then the profit will become 42,7% gaining 2,7 points, of which +5,5 points is the positive price contribution and -2,7 points is the negative cost impact.

 

Impact of Price Discounts on Profitability

Example:

Given the current profit 30% (of net sales), if the price discount of 10% is given, then the profit will become 22,2% losing 7,8 points. To compensate this price reduction and maintain the same profit in values as before the discount, it is necessary to grow volume by 50%.

Profit simulation tools:

For more flexibility you can download our profit simulation tools and tables in Excel file (created in MS Office 365 - check for compatibility). Feel free to use this file in your projects and customize it to your needs.

N1→ Profitability simulation (Impact of Price and Cost Variations)

There are 3 options in this simulation tool:

  1. Input your current profitability (gross margin in % of sales), price change in %, cost change in %. And you will get your new profitability in %. You will also see the breakdown of profitability evolution in % points due to price effect and cost effect.

  2. Input your current profitability in %, cost change in %, new target profitability in %. And you will get the necessary price change in % to meet these criteria.

  3. Input your current profitability in%, price change in %, new target profitability in %. And you will get the required cost change in % to meet these criteria.

N2→ Profit amount simulation (Impact of Volume, Price and Cost Variations)

There are 4 options in this simulation tool:

  1. Input your current profitability (gross margin in % of sales), volume change in %, price change in %, cost change in %. And you will see how the amount of gross margin changes in %. You will also get your net sales change in %, your new profitability in %, and the breakdown of profitability evolution in % points due to price effect and cost effect.

  2. Input your current profitability in %, price change in%, cost change in %, target change in % of gross margin amount. And you will get the necessary volume change in % to meet these criteria.

  3. Input your current profitability in %, volume change in %, cost change in %, target change in % of gross margin amount. And you will get the necessary price change in % to meet these criteria.

  4. Input your current profitability in %, volume change in %, price change in %, target change in % of gross margin amount. And you will get the required cost change in % to meet these criteria.

N3→ Impact of Price Discounts on Profit amount and Profitability

Input your current profitability (gross margin in % of sales) before discount, price discount in % (attention: it should be written 10%, not -10%, for example). You will get your new profitability in % and the volume growth in % which is necessary to compensate the price reduction. This volume growth means that during the period of promo action the amount of your gross margin remains the same as before giving a discount during the same period.

Furthermore, if your target is to increase the amount of gross margin, then you can input the desired growth in % of your gross margin amount. And you will get the necessary percentage of volume increase to support this profit growth.

If you have any questions or comments, do not hesitate to contact us.