(Extracted from Confessions of a Pricing Man by Herman Simon)
Revenue is the product of price and volume . Profit is the difference between revenue and cost. This means that every business has only three profit driver s: price, volume, and cost.
I would estimate that managers allocate 70 % of their time to cost issues, 20 % to volume, and only 10 % to price. The second most “popular” profit driver among managers is volume or unit sales . They are willing to invest in better sales tactics and support, building their sales forces, and refining their competitive strategies. Price typically comes in last place, and in some cases comes into consideration only as the handmaiden of managers waging a price war .
Prices get the least attention, but have the greatest impact.
We know from our investigations of tens of thousands of products that price elasticities usually fall into a range between 1.3 and 3.14 The median is about 2, though price elasticities vary greatly depending on the product, region, and industry.
On the average the advertising elasticity is in the range of 0.05 to 0.1 and the sales force elasticity is around 0.20 to 0.35. Thus the price elasticity being around 2 is on average between ten and 20 times higher than the advertising elasticity and roughly seven to eight times higher than the elasticity of the sales force investment. In other words, you would need to change your advertising budget by between 10 and 20 % or increase your sales force investment by 7–8 % to achieve the same effect you would get by changing prices by just 1 %.