The CVP model may benefit both retailers and consumers in Ramazan

Published May 14, 2018
THE basic profit strategy in other countries is based on maximising sales volume, and not increasing the price.—Online/file photo
THE basic profit strategy in other countries is based on maximising sales volume, and not increasing the price.—Online/file photo

AS THE month of Ramazan nears, there usually is a sharp increase in the price of kitchen items in Pakistan, while in other countries, such as the United Kingdom, deals and discounts are the norm during this month.

Though retailers and manufacturers give heavy discounts during this period, they still end up making a profit due to a massive increase in the volume of business. The same model can be replicated in our country if retailers rely on increased sales volume to earn profit instead of turning to malpractice.

Food consumption goes up during Ramazan. Studies indicate that since consumption surges very significantly, volume-based promotions are the most sought after by traders in Saudi Arabia and the United Arab Emirates.

Therefore the majority of businesses in the two countries prefer to offer “buy one get one free” sales followed by free gifts or extra volume offers. In short, the price is almost cut by half.

There is a cut and dried formula for this: the cost-volume-profit (CVP), a mathematical model that allows a business to conduct a thorough analysis to evaluate the effect of cost on changes in volume.

Since this model is generally used for short-term business, retailers apply it during special occasions like Christmas, Easter, etc.

During Ramazan, demand greatly influences a product’s sales volume: thus the basic profit strategy in other Muslim countries is based on maximising the volume of sales and not increasing the price

In Pakistan retailers can use this model for Ramazan and Eid. The reason for using it for the short term is that the volume of sales and the cost of materials and labour are usually known during such occasions with a considerable degree of accuracy.

CVP analysis is also used when a company is trying to determine what level of sales is necessary to reach a specific level of income, also called targeted income.

During this month demand greatly influences the sales volume of the product, thus the basic profit strategy in other countries is based on maximising sales volume and not increasing the price.

Dolmen Mall Clifton, one of the largest shopping destinations in Karachi, organised a three-day shopping festival last May to celebrate Mother’s Day. The shopping centre mostly thronged with customers from middle and lower middle class localities, and according to a rough estimate, consumption of goods crossed Rs50 million.

Economists say that this trend can be termed as a success of the CVP model. The National Retail Federation says Americans spends more than $18.6 billion on gifts for mothers, including $2.2bn just for flowers. It is interesting that Pakistan is fast catching up with the West in shopping sprees during such festivals.

To protect consumers against rising prices, the governments of many countries fix costs for a large number of food items in Ramazan to ensure price stability across the country, and conduct inspections to check on prices in supermarkets and department stores.

No retailers charge more than the fixed government price but still manage to make huge profits on sales volume. In Pakistan unfortunately, retailers exploit the financial potential of the month and yield an entire year’s profit even though the government here also issues a price list for Ramazan.

Cost accountants believe that costs and sales volume both directly and significantly affect a company’s profit-earning potential. This relationship is expressed as the CVP relationship. Profit equations have two basic factors- costs and revenue.

Thus, each of those variables will significantly impact profit. Higher costs mean lower profit, assuming other factors remain constant. Lower costs mean higher profits. When a company wants to increase profits, they can either lower costs or improve revenue.

The retailers must calculate their profits on CVP model during Ramazan to facilitate the consumers and in return the government may offer those retailers rebate on sales tax after submission of a certificate verified by their chartered accounting firms.

The Consumer Rights Commission of Pakistan can also play a significant role in implementing the CVP during Ramazan. The time has come for them to take action seriously and effectively.

The writer is a freelance contributor

mycolachi@gmail.com

Published in Dawn, The Business and Finance Weekly, May 14th, 2018

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