Increase price by $1 or revenue by $1
If you have a hardware and a software/internet business: would you rather increase price by $1 or revenue by $1 for each business. My logic is that for a software or internet business, adding an additional customer would not be associated w/ much variable cost, as the software or internet business already has fixed costs like hosting set up. Thus an increase in revenue would mainly flow to income statement. For a hardware business, producing an additional unit requires significant variable cost (materials, manufacturing, etc).
I could have it the other way around, though.
Did you remember the problem correctly? Per my understanding, a $1 increase in price is exactly the same as $1 increase in revenue. What you might be going for is an increase in price vs. an increase in volume sold.
Ah, yes. That was the question. Increase in volume v Increase in price.
In that case, an increase in price is better, because your variable costs will remain the same. An increase in volume would also proportionally increase variable costs.
Nope, you increase price by $1 you will lose some customers. Potentially losing revenue
An increase in price will lower your volume hence your costs, so the EBITDA impact is >1
In the comment above you mentioned that you meant to say increase in volume...so lets pretend you decrease price by $1 which means a substantial increase in volume.
How do you think that decrease will affect your revenue, profits, working capital, leverage and cashflow in both the short-term and the long term?
I think both would be price – I would explain that I assume the costs associated would stay the same. A lot of software businesses are able to increase price once they have locked in competitors and build a moat in terms of users/tech/etc. On the hardware side, I would assume that margins would be lower on revenue, and a $1 increase in price would most likely outweigh the lost business. Although both examples rely heavilyon assumptions...
Generally ans is price. You can come up with some defenses for volume eg if it’s a market where share gains are paramount at the moment or if it’s a land and expand strategy ($1 of volume today = 10 tomorrow) etc
Saying price is a good answer Saying price but could be volume in example a or b is an excellent answer
I think the question is would you prefer a $1 increase in price or a $1 increase in revenue, as originally stated. Software companies tend to trade (be acquired / valued) on revenue multiples. So if you increase price from say $100 to $101 you see an increase of $1. However, if the company is expected to trade at 10x revenue, and originally has $10 in revenue which can increase $1 to $11, when you apply the same 10x multiple, you will have a price of $110.
Answer is $1 in revenue. The same would apply for EBITDA of a company expected to trade on this metric. The difference is $1 in price is just that while $1 in revenue has a 10x amplification on price (e.g. $10).
Hope this helps.
This is terrible.. Then the question is just trying to trick you lol. You can make up any example and go either way. Also your statement that "$1 in price is just that," is false as you can see in the below trivial example
E.g. volume = 10, price = 1; then rev = 10. In this case $1 increase in price doubles revenue. You would prefer price.
Much more realistic is volume vs price which a principal on our tech team loved to ask assoc candidates.
Purchase price as in EV. This is straight from every interview guide. Most tech companies operate on a recurring revenue model (e.g. long term contracts with rev set), not widgets where you simply raise the price. I suppose you could raise the price of the contract by a dollar but industry bankers do not speak like this.
If you want to look at it from the perspective of raising the price of an individual good, then sure, your response works.
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