Death spiral

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.