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Profit Parabolas
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Profit Parabolas
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Price
SOURCE: BCG analysis.
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+
4. Competitors
prices and their
impact on your
volume
Profit
Basic
profit
parabola
Price
Profit
Parabola
that reflects
competitive
dynamics
Price
+
Profit
5. The entire
value chains
economics
Parabola
that reflects
all players
economics
Win-win point
Supplier
Retailer
Price
SOURCE: BCG analysis.
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4x
2x
0x
0.5x
1.0x
1.5x
Price relative to
average price (index)
Profit Parabolas
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Profit Parabolas
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5 Price
gap
3 per
unit
(cents)
1
1.0
1
Unit
sales
per week
(millions)
0.5
3
5
Each time the price gap between its brand and its
competitors private label increased, the companys
sales fell sharply. The correlation was unmistakable.
Many brands have an equally direct relationship
between price gaps and sales. The key is to develop
the data that can allow these relationships to be seen.
The Profit Pool. The profit for the entire value chain
is simply the sum of the manufacturers profits and
the retailers profits. This pool is probably the easiest
element of the profit parabola to understand and calculate. Understanding the total profit pool at every
price point can help manufacturers and retailers
determine whether certain price points (a two-for-one
promotion, for example) are worth contemplating.
The Profit Pool Split. Once managers understand
how volume and profitability vary by price point, they
can begin to take control of one of the most contentious aspects of price changes: renegotiating the
manufacturer/retailer margin split. Many brand managers, when trying to change prices, find themselves
Profit Parabolas
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Profit Parabolas
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Profit Parabolas
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Profit Parabolas
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Profit Parabolas
Amsterdam
Athens
Atlanta
Auckland
Bangkok
Barcelona
Beijing
Berlin
Boston
Brussels
Budapest
Buenos Aires
Chicago
Cologne
Copenhagen
Dallas
Dsseldorf
Frankfurt
Hamburg
Helsinki
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Hong Kong
Houston
Istanbul
Jakarta
Kuala Lumpur
Lisbon
London
Los Angeles
Madrid
Melbourne
Mexico City
Miami
Milan
Monterrey
Moscow
Mumbai
Munich
New Delhi
New York
Oslo
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Paris
Rome
San Francisco
Santiago
So Paulo
Seoul
Shanghai
Singapore
Stockholm
Stuttgart
Sydney
Taipei
Tokyo
Toronto
Vienna
Warsaw
Washington
Zrich
BCG
www.bcg.com
9/03