Is your price a plan, or a coin toss against the margin target?
Listed at $46 the margin reads 38.2%, above a 35% target. Across 20,000 futures $46 clears the target in only 55 in 100 runs. $50 clears it in 85 in 100, and that is the price with 80% odds.
Finance Starter Monte Carlo Pro engine
After you install, this is the model to open.
What price keeps 80% odds of hitting the margin target?
- In your spreadsheet, click the Sortia icon in the strip of icons down the right-hand edge. No strip? Click the arrow at the bottom-right to open it. You can also use Extensions, then Sortia, then Open Sortia.
- Click Start from a template and put that name in the search box.
- Pick the card with that name and click Load this template. It arrives on a new tab with real numbers already in it.
This one runs on a Pro engine, and every free install includes five full-quality runs on your own numbers, shared across all five Pro engines rather than five for each. After that, Pro is $199/year.
What it does
A product listed at $46 that costs $24 a unit to make and $3 to ship, sold at a 5% discount on average, against a margin target of 35% of the net price. As typed, holding at $46 gives a 38.2% margin, raising to $50 gives 43.2% and $54 gives 47.4%, all three above the target, and on those numbers there is no reason to touch the price. Click Run with unit cost, freight and the discount as three-point estimates.
The seed is set to 7 and the trials to 20,000 so your first run reproduces these figures exactly. Holding at $46 clears the 35% target in 55 in 100 runs, with a median margin of 35.7%. Raising to $50 clears it in 85 in 100 with a median of 40.9%, and $54 clears it in 97 in 100 with a median of 45.2%. So $50 is the price that keeps at least 80% odds of hitting the target, and $46, which the sheet showed comfortably above target, is a coin toss dressed up as a plan.
Unit cost is the whole story: it leads the tornado at -0.90 and carries 82% of the spread, and the discount is a distant second at -0.31. The three candidates share one draw of cost, freight and discount in every trial, so the three readings are comparable and the difference between them is the price alone. Second run: if a supplier contract can hold the unit cost at $24 with a range of $23 to $26, narrow that draw in the Risk Analysis panel and rerun.
The odds at $46 rise sharply and the case for raising the price weakens, which is the honest comparison between a price rise and a procurement negotiation. What the model cannot tell you: it assumes the units sold do not fall when the price rises, because the unit count is not in the model at all, so these are odds of the margin, not of the profit; the discount is an average across deals rather than a draw per deal; and a margin target is a rule of thumb, not a goal that the customer shares.
To make it yours, retype cost, freight, discount, the target and three candidate prices of your own, and set the three ranges on the matching draws in the Risk Analysis panel.
The model
It arrives on a tab called Template: Price With 80% Odds, carrying these columns:
- Unit cost ($ per unit)
- 24
Once it is in your sheet
- The model arrives with real numbers in it and runs as it stands, so you can press the button first and understand it second.
- Change the numbers to yours. The sheet marks which cells are inputs and which hold formulas, and most labels carry a note explaining the row.
- Press the run button at the bottom of the panel. It is labeled for the tool you are in, and the result lands on its own tab, with a written reading of it beside the figures.
Never used Google Sheets? Start here goes the whole way, in seven steps, and assumes nothing.
Next question
- What does the monthly transfer have to be for the goal to hold nine times in ten?What monthly saving gives 90% odds of hitting the goal on time?
- A $10,000 product launch with an uncertain price, an uncertain quantity and an uncertain unit cost. One recalculation shows one NPV and tells you nothing. Twenty thousand show a mean of $24,879, a median of $24,291 and a positive NPV in 99.6% of them.What are the odds this project clears a positive NPV?
- When does your startup actually run out of money?When Does the Startup Run Out of Cash?
- What is the business really worth?What Is the Business Worth, as a Range?
- After this round, what do you actually walk away with?What Do the Founders Keep After the Round and the Exit?
- Does the launch still pay after it eats the flagship?Launch With Cannibalization
Every model like this one, and the method behind them: Monte Carlo simulation.