From: hwhalen@jupiter.sun.csd.unb.ca (Hugh Whalen)
Subject: Re: Rude behavior on this group.
Organization: Faculty of Administration, University of New Brunswick
Date: Thu, 17 Dec 1992 15:01:32 GMT

In article <1992Dec16.215923.4494@mksol.dseg.ti.com> mccall@mksol.dseg.ti.com (fred j mccall 575-3539) writes:
>In <1992Dec15.192137.6763@jupiter.sun.csd.unb.ca> hwhalen@jupiter.sun.csd.unb.ca (Hugh Whalen) writes:
>
>>In article <1992Dec15.183951.23430@mksol.dseg.ti.com> mccall@mksol.dseg.ti.com (fred j mccall 575-3539) writes:
>>>In <1992Dec15.054239.12858@microsoft.com> richs@microsoft.com (Rick Schaut) writes:
>
>>[enormous amount of stuff on passing through costs deleted]
>>>
>>>And you can bet that those costs are 'passed through', or you're
>>>looking at a vendor who won't be in business very long.
>>>
>
>>Not necessarily. For example.
>
>>Selling price of PC is $1500, cost is $1200 so profit per unit is 
>>$300. Producer sells 10,000 units so profit is $3,000,000. 
>
>An example with a 20% profit after all costs, and you call this a
>'competetive environment'?  I'd like to see a clone maker of commodity
>PC equipment that is clearing 20% profit per unit shipped.  Not much
>competition there, or they wouldn't have that kind of profit margin.

   If I had said that the margin is $50 and the cost of the software is 
   $8 (I believe that this is the figure quoted in the trade rags for 
   some of the producers who install Windows for Workgroups) the numbers 
   would change but the point would be exactly the same. Your objection, 
   in this case is wrong.

>
>>Producer adds in software with cost of $50. Cost is now $1250 and 
>>selling price *remains*  at $1500 so profit per unit is $250. But (and 
>>this is the important part) since software is now included the 
>>producer sells 12,000 units. 
>
>Based on ZERO evidence that this happens, and the complaints of a lot
>of people who don't WANT the frigging software.  Once again, a
>somewhat less than realistic example.

  Sigh. Before I was a business professor, I was a Chartered 
  Accountant (the Canadian equivalent of a CPA). As part of audits,
  giving general finanacial advice, etc. I was often involved in 
  discussions of price setting policy. This is at least one of the
  things that people consider when setting prices. I *have* seen it.
  Businesses do think that way. I have sat in on discussions of price   
  setting at least a dozen times. I *know* how the real world works, at
  least in this area. This is not a personal flame, I have a read a great
  deal of what you have written on this newsgroup and found much of it 
  informative, you are just plain wrong on this point. The cost of add
  ins is just one of a huge number of factors that one considers when 
  setting prices. More important are things like sales volumes, 
  corporate strategy, demand, market penetration, total profits,
  etc.

  Accountants and marketing specialist often use HUGE spreadsheets to 
  analyse the effects of cost add ins and price changes on such things
  as market share, profit, return on investment, etc. If it were as 
  simple as you say .... increased cost means increased price they
  would not have to do all this. It is simply not that simple.

>
>>Profit is again $3,000,000. If the 
>>producer sells more than 2,000 extra units his profit will in fact be 
>>higher. If he sells less than 2,000 extra units he will have made a 
>>bad business decision and will make less profit. What counts is 
>>*total* profit not profit per unit. Businesses make these types of 
>>decisions all the time. While it may seem reasonable that costs are 
>>*passed through* this is not always the case. 
>
>In a highly competitive market, you don't have the kind of profit
>margin to eat those kinds of costs.  Take that 20% profit down to
>around 2%-5% and see what your numbers do.

  See above.

>
>>Cost is only one factor that a business considers when setting a 
>>selling price. Other factors such as price/demand, competition, etc. 
>>are often as important or more important.
>
>You're assuming a non-competitive market that allows large initial
>profit margins.  Do you really think that that's the kind of market
>that PC cloners are looking at?
>

Actually, I am assuming competitive markets. In *non-competitive* 
markets such as monopolies producers can pass on price increases with 
impunity. In competitive markets, competitive pressures prevent this.

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.

Hugh Whalen                     | Where all men think alike, no one
Faculty of Administration       | thinks very much.
University of New Brunswick     |               - Walter Lippmann			


DISCLAIMER: Neither UNB nor I care what the other thinks.
Newsgroups: comp.os.os2.advocacy