Laurie consulting

The spiral of death

This is a phenomenon where companies using a cost plus profit target method of pricing get into a vicious circle of increased prices and reduced volumes.  This is how the circle works:

The company faces an increase in unit costs.
 It increases prices by adding a profit target to
 the new costs.
The increase in prices results in  a
reduction in sales.
The company now has to spread its fixed
 costs over a smaller volume of sales.  So
 unit costs rise.
The company is now back to the beginning.
 It must make further price increases and the
spiral continues.