Price Analysis Is One of the Most

¶ … price analysis is one of the most important tools used when making a pricing decision. Basically, you need to be able to evaluate the costs, fixed or variable, that your company has and examine how the prices you fix for your goods will affect the overall profits of the company. When making a pricing decision, you need to evaluate whether having lower prices and higher volumes of sales (theoretically, when you lower the prices, you would expect the volume of sales to increase) will give out a revenue value enough to cover the costs the company has.

There are three main types of tools that a CVP analysis uses: breakeven analysis, contribution margin analysis and operating leverage. The former allows the company's management to evaluate "the sales volume you need to break even, under different price or cost scenarios"

and may be considered the most important element in a pricing decision.

It is relatively simple to determine the relationship between costs, volume and profit. Profit is generally determined as the difference between overall sale costs and overall revenues from sales. Decreasing the price will increase the volume. What CVP needs to determine is to what extent the company can lower price in order to be able to cover the fixed and variable costs. If the strategic decision lowers prices too much, then the total revenues, calculated by multiplying the price per product with the volume of sales, will lower overall profits.

In my opinion, quantitative and qualitative analyses are different with respect to the actual issue that is being evaluated. In this sense, quantitative analyses are used when dealing with issues that can be practically measured. The number of goods sold or the revenues a company makes in a period of time, calculated by multiplying the volume of sales with the price these goods were sold at, are good examples in this sense. On the other hand, many of the company's activities cannot be measured by concretely. For example, it would be hard to evaluate the quality of the sales team activity or its level of satisfaction. This is why the company needs to find additional means of evaluation.

The CVP analysis is measurable and may be considered, in this sense, a quantitative analysis. The facts are quite simple in this case: the volume of sales can be measured, as can the fixed and variable costs and the overall total profits. This leads to the decision that will be made related to the pricing strategy of the company.