UK Why does a pp of price not equal a pp of GM?


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Obviously I can do the math and see that it's not the same but I can't in simple terms explain why - is there a theoretical explanation that would make it easier for me to explain?

Add price of 1pp
Sales 100-->101
COGS 50-->50
GM 50-->51
GM% 50.0%-->50.5% or ~.5pp
 
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kirby

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Do not have a theoretical explanantion
but
the original GM ratio says you make 50 cents of margin for every dollar of sales
or 50%
so when you add 1 more dollar of sales and same cost you get your extra 50 cents
not a full dollar.
 
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That's the part that I'm struggling with - that would make sense except a dollar of price doesn't cost you any more so why doesn't the margin go up by a pp?
 
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kirby

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Try this
Instead of COGS of 50 use a COGS of 20
Now your GM as a percentage looks really odd (increase of 0.2%)
and I think the point is that you need to look at the GM in dollars not as % to see your improvement in terms that are more easily explainable.
 

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