How to analyze a supplier price increase

What you need

• The previous unit cost for each affected item — the price you have actually been paying.
• The new unit cost from the supplier's notice, and the effective date.
• Your current selling price for each item, if you want the margin impact as well as the cost change.

The method, step by step

1. Pin down what actually changed

   From the supplier's notice, list the affected items and the effective date. For each item, put the previous unit cost next to the new unit cost. The previous cost is what you have actually been paying — your last invoice or the current price file — not an old quote you never bought against.

2. Calculate the absolute cost change

   For each item, the absolute change is the new unit cost minus the previous unit cost. A positive number is an increase; a negative one is a decrease.

   absolute change = new cost − previous cost

3. Calculate the percentage change

   Divide the absolute change by the previous cost. This is the figure most people mean by “the increase”. If the previous cost is zero there is no meaningful percentage, so leave it blank rather than reporting infinity.

   percentage change = (new cost − previous cost) ÷ previous cost

4. Decide the scope: one item or the whole list

   If one or two items changed, work through the rest of this method by hand or in the calculator. If the supplier re-priced dozens or hundreds of lines, doing each by hand is slow and easy to get wrong — that is a price-list comparison, covered separately below.

5. Measure the gross-margin impact at your current selling price

   Gross margin as a rate is the selling price minus the cost, divided by the selling price. Compute it once with the previous cost and again with the new cost, keeping your selling price unchanged. The drop between the two is what the increase costs you per unit if you do nothing.

   gross margin = (selling price − cost) ÷ selling price

6. State the margin change in percentage points

   Subtract the previous margin rate from the new margin rate. The result is a movement in percentage points — a margin that falls from 50% to 42.5% has dropped 7.5 points, not 15%.

   margin change = new margin rate − previous margin rate

7. Find the selling price that preserves your previous margin

   Divide the new cost by one minus your previous margin rate. That is the selling price at which the new cost earns the same margin rate you had before. The price adjustment is that figure minus your current selling price.

   margin-preserving price = new cost ÷ (1 − previous margin)

8. Read the numbers before you decide

   The analysis gives you the size of the cost change, the margin hit if you hold your price, and the price that restores the old margin. What to do with that — absorb it, pass it through, go back to the supplier, or look at alternatives — is a separate decision, laid out on the supplier price increase page. This method gets you the numbers that decision needs.

Margin is not markup

Gross margin is profit as a share of the selling price: (selling price − cost) ÷ selling price. Markup is profit as a share of cost. They have different denominators and give different numbers. This method uses gross margin throughout — a price increase sized as a markup will not restore the margin rate you had.

A worked example

One item. The supplier raises the unit cost from 40.00 to 46.00 and the selling price stays at 80.00. Numbers are illustrative and in any currency.

The 15% cost increase cuts the gross margin from 50% to 42.5%, a drop of 7.5 percentage points. Restoring the previous 50% margin needs the selling price to move from 80.00 to 92.00 — a 15% increase, the same proportion as the cost change, because the margin rate is being held constant.

One item versus the whole price list

This method is per item. To run it interactively for a single item — including the edge cases, such as a previous cost of zero or a cost above the selling price — use the supplier cost increase calculator.

When a supplier re-prices many lines at once, applying the steps by hand across a long spreadsheet is where errors creep in. That is a comparison of your previous and current supplier price lists, row by row — see supplier price list comparison and the guide to comparing two supplier price lists. In CostRift those files are read in your browser and are not sent to CostRift servers to run the comparison; only structured rows are stored, and only if you sign in and choose Save to History (see the Privacy Policy).

Common mistakes

• Comparing the new cost against an old quote you never actually bought against, instead of the price you have been paying.
• Sizing the price response with markup (profit over cost) when the target is a margin rate (profit over selling price). They are different numbers, and a markup-based rise will not restore the margin.
• Reporting a percentage change when the previous cost is zero — it is undefined, not infinite.
• Analyzing only the largest line items. A cluster of mid-sized increases in the middle of a long list adds up and is the part that usually gets missed.
• Treating the margin-preserving price as a recommendation. It is a reference point — what keeps the old margin rate — not advice on what to charge.

FAQ

Where to go next

For a single item, the margin impact calculator does the arithmetic above interactively. For the decision that follows — absorb, pass through, renegotiate, or re-source — see responding to a supplier price increase. If the question is instead which of several suppliers is cheapest for the same items, that is a different comparison — see comparing supplier quotes.