Cutting prices by 5% can cost you as much as losing 10% of sales. How to see it before it happens.
Key findings
- In the example, 90,000 of sales leaves 15,000 of profit, with a 33% margin of safety.
- 10% fewer units, 5% lower prices or 10% higher variable costs all leave profit at 10,500.
- Build a combined pessimistic case and compare it with reality every month.
Why budget with scenarios
A budget with a single figure gives false confidence: it almost never comes true exactly. With scenarios, instead of asking “how much will we make?”, you ask “what if we sell less, cut prices or costs rise?”, and you prepare for each case.
Step 1: the base case
Start with what you really expect, product by product. A hypothetical example with two products:
- Product A: price 100, variable cost 60, 500 units.
- Product B: price 40, variable cost 15, 1,000 units.
- Fixed costs: 30,000.
You sell 90,000 with a 50% contribution margin and keep 15,000 of profit. Break-even is at 60,000 of sales, so the margin of safety is 33%: you could sell a third less before making a loss.
Step 2: change one thing at a time
| Scenario | Sales | Profit |
|---|---|---|
| Base | 90,000 | 15,000 |
| 10% fewer units | 81,000 | 10,500 |
| Prices 5% lower | 85,500 | 10,500 |
| Variable costs 10% higher | 90,000 | 10,500 |
| 10% more units | 99,000 | 19,500 |
The lesson: cutting prices by 5% costs as much as losing 10% of your units. Before discounting to sell more, check how much more you would need to sell to make up for it.
Step 3: combine a pessimistic case
Problems tend to come together. Build a pessimistic scenario combining several things (lower sales and higher costs) and check whether your cash could absorb it. If not, decide today what you would do: which costs you would cut, which prices you would raise or what financing you would seek.
Step 4: compare it with reality
Every month, compare actual figures with the budget and find the cause of the differences: volume, price or cost. That way you will know which scenario looks most like what is happening and can react sooner.
Test your scenarios with the scenario simulator, analyse variances with the budget variance calculator and check the effect of a discount with the discounts calculator.