How should businesses go about conducting a profitability analysis?
Choosing a price for your product is one of the most fundamental and important decisions managers face, and it is often one of the hardest. Pricing decisions require managers to understand how sensitive consumer demand is to changes in price. This requires constructing and interpreting a demand curve to understand how responsive (or elastic) customers’ demand for a product is to a change in price. The pricing and profitability toolkit guides managers in how to construct a demand curve, how to calculate the price elasticity of demand, and how to use these metrics to inform the process of choosing a price. Once a price point is chosen, managers need to understand the impact of that price on their financial projections for the firm. Profitability analysis begins with calculating the revenue the firm will generate from sales of its products. Then, an analysis of variable and fixed costs is undertaken. Finally, these numbers are used to calculate the profit or margin the firm will earn from
