Average Price Decline Calculation

Question

This is a fantastic case and one of my favourite so far. What is the value add of calculating the weighted average of average price decrease? How will that constribute to figuring out the root cause of the profit margin decline? Thank you.

Answer 1

Hi there,

The weighted average just gets you the % decline of your total profitability. You need this because otherwise your numbers mean nothing!

The alternative method is to add the absolute price decrease impact across each product to each other. Then divide that number by the total revenues.

^but this is just a weighted average by another name

What I mean is, you can't just say "profits for x product will fall x% and for y product they'll fall z percent". What matters at the end of the day is to the overall business, hence needing to understand total impact :)

Answer 2

Hello Ksenia,

First of all thank you for your kind words!
A general profit margin decline can be driven by lower prices or higher costs. The aim of calculating the weighted average of the price decrease is to understand the overall impact of this trend on our profit margin.
Let's do a quick example: you have a product A which price is increased by 5% and a product B which price decreased by 10%. In order to understand if overall impact is positive or negative in term of price variation, you have to weight these numbers with revenues of each product.

Is it clear now?
Feel free to PM me if you want to discuss this furher!

Best,
Luca

Answer 3

I'm seeking clarification on the question;

1) how is value measured (time savings? for example)?

Weighted average gives extra consideration to the highest leverage price/product in this case. So perhaps it could help identify if the weight distribution between the various products needs to be readjusted.

Please advise. Thank you.