STAY EVEN ANALYSIS, PRICING, and ELASTICITY

“Stay-even analysis tells you how many sales you need when changing
price to maintain the same profit level.”
Instead of asking which price maximizes profit, you
instead ask "will a given price increase, e.g., 5%,
be profitable?
Two Step Procedure
1. Compute the stay-even quantity, the
quantity you can afford to lose and still
break even;

2. Predict (or guess) whether the actual

quantity lost will be greater or less than the
stay-even quantity.
The benefit of a price increase is the extra revenue you earn at
the new (and lower) quantity, Benefit=dP*(Q+dQ)
The cost of a price increase is the margin on the lost sales,
Cost=dQ(P-MC)
where dP=P1-P0
dQ=Q1-Q0
P0=initial price
You compute the P1=final price
Q0=initial quantity
Quantity at which you Q1=final quantity.
are indifferent between
raising price or not, and
(dQ/Q)=(dP/P)/[(dP/P)+m]
you get the formula:
where m=(P-MC)/P, dQ/Q=% change in Q, and dP/P=%
change in P.
= 100% / [100%+(0.75-0.5)/0.75]
= 100%/1.33
= 75%
= 5% / [5%+(0.75-0.5)/0.75]
= 5%/.3833333
= 13%
PRICE = $1.50
COST = 0.50
MC = $1.00

PRICE = $0.75
COST = 0.50
MC = $0.25
 “If the predicted quantity is less
than the stay-even quantity,
then the price increase will likely
be profitable, and vice versa.”
Qp<Qse= price increase is profitable
Qp>Qse= price increase is not profitable
This actually simplifies the decision to raise a price
or not. This does not take into account customer
loyalty or loosing repeat business but it simplifies
the formula and train of thought for increasing
the price. –Kevin Woods