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Category: Miscellaneous
Volume: 24
Issue: 5
Article No.: 3873

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Plastic Perspectives

We expect a strong recovery (at last) in our corner of the Plastics Industry, beginning 4Q 2003 and continuing into 2004. It is well to point out some critical strategies on the eve of such a turnaround after almost three years of sluggish to no growth.

One of the key factors must be pricing for a recovery and some key issues must be considered.

It sounds easy for a distributor to give bigger discounts as a convenient way to increase sales. It makes customers “like” doing business with that distributor. Sometimes a company feels compelled to a lower price to be in line with the “going rate” of what competitors are charging. These are all understandable motives. Yet, rampant price cutting is one of the quickest ways for a company to drive itself out of business.

Constantly lowering prices can kill profits:

Let’s do a little arithmetic. Suppose a distributor charges $100 for a particular product for which he paid $75 per unit. The gross profit is therefore $25.

$100 Selling Price - $75 Cost = $25 Gross Profit
Competition has now heated up, however. In order to remain competitive, suppose that distributor decides to lower the price by 10%. The selling price is now $90. The distributor still had to pay $75 for the product, so the distributor's gross profit falls to $15.
$90 Selling Price - $75 Cost = $15 Gross Profit
There’s a stunning imbalance hidden in those numbers. The distributor lowered the price by 10%, but as result lost 40% of the gross profit dollars.
$15 Gross Profit
$25 Gross Profit = $60%, or 40% less profit
Making it up in volume is a fallacy It’s quite possible that by reducing prices 10% a distributor might well increase sales of those products. But it’s unlikely sales would rise enough to make up the difference in gross profit dollars.

If you look at it in terms of dollar volume, instead of selling $10,000 worth of products (100 x $100 each), the distributor would have to sell $15,030 worth (167 x $90) to achieve the same gross profit dollars. That is an increase of more than 50% in dollar volume, along with a 67% increase in the number of units that must be sold.

In conclusion – watch your bottom line before discounting – even in this competitive market!

For more information, click on the Author Biography link at the top of this page.

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