No straight answer but really you should understand the basics of profitability analysis and thus form your reply.Market A - Year 1: Sales income = 40 units, Other income = 20, Staff cost = 30, Marketing cost = 10. Market B - Year 1: Sales income = 3, Other income = 4, Staff cost = 3, Marketing cost = 0. Price (unknown)Fixed costs (staff)Variable costs (sales)sales volume (income)sales volume (income not directly attributed to sales)Price has a 2x or 3x impact of other drivers and has greatest impact because every additional dollar goes straight to profit. By comparison, an increase in sales volume will be accompanied by an increase in variable costs, so the gain will be smaller. A decrease in variable costs will increase the margin but will not increase overall revenue. Finally, a reduction in fixed costs (i.e. overhead) has no impact on revenue and therefore will always have the smallest impact of all.The strategic implications of this analysis are very important. Many business people are preoccupied with getting more revenue, often from new customers. However, they often pay little regard to the customers they already have and usually adopt the view that price is something over which they have very little control because of competitive pressure (classic mistake #1). They also believe that reducing costs is the most effective way to building a profitable business (classic mistake #2) Even though it makes intuitive sense that cutting costs leads to improved profitability, there is a big qualifier to this. If a cost is necessary for you to do business (for example, customer service costs, or foreign offshoring), then reducing it may reduce your capacity to do business. Furthermore, the costs that can be reduced most easily are usually those of a "discretionary" nature, and these tend to be the ones geared toward building the future of your business (marketing, team training, R&D, etc.).As far as pricing is concerned, you might be thinking to yourself: "That's all well and good in theory but if I increase my prices, how much business would I lose?" That's a good question but a far better one is, "How many customers could I lose and still make the same amount of profit?" The answer might surprise you. For example, it is entirely possible that a company could raise its prices by 10%, lose 25% of its customers, and actually make more profit. In other words, the company could lose a quarter of its customers and still be better off. Furthermore, if that were to happen, which customers do you think the company might lose? We suspect that it might be those customers who are most price-sensitive and cause the greatest amount of stress for you your team.
