From: discar@nosc.mil (Joe Discar)
Subject: Re: Rude behavior on this group.
Organization: Naval Ocean Systems Center, San Diego
Date: Thu, 17 Dec 1992 21:41:24 GMT

In article <1992Dec17.184850.29530@mksol.dseg.ti.com> mccall@mksol.dseg.ti.com (fred j mccall 575-3539) 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.

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).

	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.


>
>>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...

Joe
My opinions.


Newsgroups: comp.os.os2.advocacy