From: discar@nosc.mil (Joe Discar)
Subject: Re: Rude behavior on this group.
Organization: Naval Ocean Systems Center, San Diego
Date: Fri, 18 Dec 1992 19:19:42 GMT

In article <1992Dec18.171455.27141@mksol.dseg.ti.com> mccall@mksol.dseg.ti.com (fred j mccall 575-3539) writes:
>In <1992Dec17.214124.10789@nosc.mil> discar@nosc.mil (Joe Discar) writes:
>
>>>No, in a pure competitive market, profit margins at the margin will go
>>>to zero.  Adding features may move the demand curve to the right, but
>>>unless you can be in a different MARKET with the added features, you
>>>cannot add anything that adds cost.  Now, there are market share
>>>considerations and such which I didn't touch on, but I didn't touch on
>>>them because they are irrelevant.  You simply cannot, over the long
>>>term, lose a little bit on every sale but make it up by having a huge
>>>volume. 
>
>>WRONG!  Here's a simple example:  Network cards from one distributor I use
>>cost me $100 each in quantities of two or less.  If I buy three through
>>five, they cost me $95.  If I buy over five, they cost me $90.  I do not
>>"lose" money because I have a big volume: if it "costs" me two bucks
>>per card sold to add a "feature"--but adding that feature allows me to
>>sell six cards, I make more money than if I sold six cards one at a time.
>
>WRONG!  You can't read (as usual), Joe!  Note the statement LOSE A
>LITTLE BIT ON EACH SALE AND MAKE IT UP IN VOLUME.  You show me how you
>can do THAT.

Albeit, the context was removed, but the thought is still there.  You were,
I believe (and so do others), postulating that Vendors are charging you
for Windows+DOS even if you don't need it.  I am illustrating that, in
fact, Windows+DOS could be "free" because the increased volume in sales
would lower the cost of the machine.  You are saying "they can't over the
long term, lose a little bit on every sale..." and I am showing you that
it is very likely that THEY AREN'T LOSING ANY MONEY, GIVING BETTER
"BUNDLES", AND KEEPING THEIR PRICE THE SAME.

You just have a problem understanding (as usual), Fred!


>
>>I.e., I resell the cards for $110:
>>     My profit = $110 * 6 - 6 * 100 = $60 (if I sold them one at a time)
>
>>     ...or...
>
>>     $110*6 - ($90+2)*6 = $72 (if I built up enough volume quickly enough, due
>>				to a $2.00 addin-cost to purchase six cards
>>				at one time).
>
>Nice.  You can do arithmetic.  Now tell me again how you can sell each
>of those cards at a loss, but if you sell a lot of them you will get a
>profit. 

But I am trying (as I said above) to illustrate that they likely AREN'T
making a loss... but you're making the ASSumption that they are.  Just
because they keep the same fixed price (i.e. $110 in the above example),
but giving more (the $2.00 add-in) doesn't mean they're making less money.

>
>>	This type of discounting happens ALL THE TIME.  It happens
>>	with automobiles ("we'll sell two dollars over factory invoice..."),
>>	it happens with pharmaceuticals... and believe it or not,
>>	regardless of what you think, a company can "absorb" the cost
>>	of an $8.00 Windows+DOS package, if they can generate enough
>>	volume to push the cost of the machine below a sales level.
>
>WHAT DOES THAT HAVE TO DO WITH WHAT I SAID, JOE??  ARE YOU OUT THERE?

And just because you have a hard time grasping analogies, doesn't make
my illustrations less applicable (you oughtta try to run a business for
ten years... and then you'll have a different insight on How Things
Work).  What is so hard in realizing the concept?  Car dealers get
incentives from the manufacturers if they sell past a given volume--this
is why you see Dealers "throwing in all the options" for cars without
changing the extended price of the car: they are banking that the volume
thus generated will bring their realized cost of the car down--thereby
making a profit.

Computer Dealers do the same thing.  I know of one dealer that sold
Fujitsu products AT COST, just so that they could pass the $10,000 mark
that brought them to a different dealer level.  Likewise, I sold the
first $10,000 of Artisoft products at a "loss" so that the next $20,000
would yield me a better return (more than the $30,000 in normal sales would
have yielded).

So do not assume that "adding a feature" necessitates a LOSS.

>
>>>
>>>>One company that I was involved with was in a very competitive market 
>>>>- sporting goods accessories (sorry cannot be more specific .... 
>>>>client confidentiality). They sold a product to a large retail chain 
>>>>for approximately $15. Their profit per unit was 25 cents .... less 
>>>>than 2%. They could not pass on their costs precisely *because* they 
>>>>the retailer could buy the product elsewhere if they raised their 
>>>>prices - i.e. it was a competitive market. They had to sell product 
>>>>and they felt it was important that their product be in this 
>>>>particular retail outlet. 
>>>
>>>>I believe that you have this backwards.
>>>
>>>No, I think we are looking at it from slightly different perspectives
>>>is all.  You are adding the feature and assuming minimum profit; I am
>>>starting from the competetive minimum profit and then trying to add a
>>>feature that has cost.  If the cost is larger than your profit margin,
>>>you will simply HAVE to pass it through.  If the 'agreement' with the
>>>feature adder is that the feature must be on ALL sales (or that they
>>>are going to charge you on the basis of all sales rather than just on
>>>those which contain the feature), then they are going to pass through
>>>that cost (you pay for the part of the allocated costs going to that
>>>feature whether you want that feature or not).
>
>>But business people do not sign such agreements without thinking
>>that it would be profitable.  *I* would sign an agreement for a low-than-
>>cost price for Windows if I thought that the added volume in sales
>>would build up demand for sales...
>
>OF COURSE they expect to make a profit, Joe.  But that has nothing to
>do with whether people who DO NOT WANT WINDOWS AND DOS are paying
>those costs anyway if the agreement says you HAVE to include it.
>

Think about it. 

(1)  	If I find that DOS pre-installed on a machine is in
	much GREATER demand than a "bare" machine, I will endeavor to
	install DOS on my machines.

(2)	If I need to install DOS most of my machines, I will endeavor to
	get the best price for for DOS.

(3)	If I want to get the best price for DOS, I need to sign an
	agreement with Microsoft to put DOS on EVERY machine (but since
	by (1), there is a greater demand, I would not consider this
	much of a restriction).

(4)	I therefore sign the agreement, and put DOS on every machine.
	...and make a bigger profit.  Who cares what the MINORITY
	buyers want? 

Those people who DO NOT WANT WINDOWS AND DOS, are not "paying for it."
They are simply (as all my illustrations ATTEMPTED to show [kinda like
teaching an earthworm the colors of the rainbow]), paying the same
price they would normally pay for such a system--and declining the
"freebie" that essentially came of the volume generated by the sales
to those who do want Windows.

The clincher, Fred, ami, is that in the end, if you don't like it, don't
buy it from the vendor.  Because the decision to sign the agreement and
to bundle DOS, Windows, etc. is a BUSINESS decision--and the businessman
could do whatever he pleases.

Keep in mind that almost all large vendors are doing this because it
maximizes their profit.

-> Joe <-

My opinions.

Newsgroups: comp.os.os2.advocacy,comp.os.os2.misc