As the prices of products decreases, sales volume increases and hence the revenue. As prices are increased, sales volume decreases, but revenue is still high because of the higher prices. This calls for a trade-off between the price and the revenue which indirectly means the price and the volume. The aim is to achieve a balance between the two of these factors and maximise the revenue.
Factors that have to be taken into consideration while making a sales/price analysis are sales prices, unit costs, sales volume, and sales mix, if it is a mix of certain products. Even situations like when discounts are offered should be taken into consideration while making a sales/price analysis. Normally, the breakeven price, i.e. the price at which all costs are covered is calculated as a base and then pricing is done so that the company earns a profit. Later, a sales/price analysis is performed as the business progresses, in order to maintain pricing in a range so as to maximise profit or revenues.
For example, suppose that a product is priced at Rs. 500 and it sells 1,000 units a month. This means the total revenue from that product is Rs. 500*1,000 = Rs. 5,00,000. If the retailer wants to reduce the product’s price to Rs. 400, his expected sales are 1500 units. Now his revenue is Rs. 400*1500 = Rs. 6,00,000. If his expected sales were 1200 units, then his total revenue from that product would be Rs.400*1,200 = Rs.4,80,000. In the second case, a reduction in the price is not helping the retailer increase his revenues from the product. So here, a price reduction is not advisable. In the first case, he was earning a profit of Rs. 6,00,000-5,00,000 = Rs.1,00,000 which means the price reduction is advisable. The variance in actual and expected sales should also be taken onto account in a sales/price analysis.