Online price vs retail store price?

Discussion in 'NZ Computing' started by Squiggle, Dec 1, 2007.

  1. Squiggle

    Alan Guest

    Hi Impossible,

    Perhaps you could set out a simple example of how MC = MR maximises
    profit for a retailer.

    If it helps, use the following:

    Retailer sells widgets. A widget costs $1.00 each from their
    supplier.

    Their only overheads are salaries of $1000 a year, and rent of $2000 a
    year.

    I will be interested to see how we are all so wrong.

    --

    Alan.

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    Alan, Dec 5, 2007
    #61
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  2. Squiggle

    Craig Shore Guest

    So what if there isn't 20% markup in the first place, and the staff including
    the manager are all on wages / salery?
     
    Craig Shore, Dec 5, 2007
    #62
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  3. Squiggle

    impossible Guest

    Start here ....
    http://en.wikipedia.org/wiki/Profit_maximization

    ..... and follow the links.
     
    impossible, Dec 5, 2007
    #63
  4. Squiggle

    Alan Guest

    Hi Impossible,

    I followed the links - good stuff.

    However, I think you'll find that, if you do the sums yourself, you'll
    see where the problem lies in your extension of the theory you've
    read.

    Give it a go and post your numberical example - I am very happy to be
    proven wrong!

    --

    Alan.

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    Alan, Dec 5, 2007
    #64
  5. Squiggle

    Alan Guest

    Then you wouldn't get a 20% discount I suggest!

    Personally, I don't know many retailers with much less than 100%
    mark-up, much less 20% - but it does vary and IT equipment is perhaps
    a less than, say, clothing. There may be retail segments with much
    lower average mark-ups still.

    For example, clearly supermarkets would be much lower (I am not
    familar with supermarkets in the way I am with 'high street' retailers
    but I suspect their margins are closer to 10%).

    I doubt you'd ever get a discount in a supermarket no matter what
    their margins are.

    HTH,

    --

    Alan.

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    Alan, Dec 6, 2007
    #65
  6. Squiggle

    impossible Guest

    Assume a competitve market, and assume that the market-clearing price for
    widgets is $1.50. That's what customers on average are willing to pay, and
    anyone who consistently charges more than that can expect on average to sell
    fewer widgets in the same space of time. Since revenue=price*quantity, there
    is no sense then in any retailer trying to increase their total profit by
    over-charging; similarly, there is no sense in any retailer trying to
    increase their total profit by under-charging. Retailers are, in the
    language of economics, price takers - prices being "given" by the market.
    How then do retailers maximise total profits? Using the marginal
    cost-marginal revenue method, it's a matter of calculating just the right
    quantity to sell. You'll notice that your marginal costs (costs per
    additional sale) fall sharply at first, from a high of $2000+incremental
    salary share on the first widget sold sale to simply the incremental salary
    share on each unit sold thereafter. Since marginal revenue is a flat $1.50
    per unit, this cost structure requires you to sell
    (2000[rent]+1000[salary])/1.5 units per year to break even -- anything above
    that number will be sheer profit. Maximising profits then would seem to be
    nothing more (or less) than maximising sales? But is it really? For some
    goods, it probably is, and that sort of example is perhaps what you have in
    mind. But the appeal of using the marginal cost-marginal revenue method is
    that it allows for more complex real-world situations. For example, maybe
    it's relatively easy to push the first 500 widgets out the door -- you can
    do it with just the staff you have and without making any investments in
    advertising. But then you notice that it gets tougher -- your competitors
    are putting circulars in all the mailboxes and attracting customers to
    special "sale days", so maybe you should do the same. You know that the
    demographics of your main widget customers are 21-40, but you're not sure
    how to draw new potential sales to your store without consulting a marketing
    agency. Suddenly then, your marginal costs start to rise: you're selling
    more, thanks to your new investments, but the per-unit profit is down. The
    rate at which you're getting to the break-even point (and hopefully beyond)
    is slowing down. You still need to at least get to that break-even point to
    avoid losing your shirt. But if you're not careful, you could actually start
    **losing** money on new sales. SO.......The only way to avoid this
    predicament is to locate the intersection of the marginal cost and marginal
    revenue curves (I'll refer you back to the wiki I referenced earlier) and to
    trace a line then straight down from there to the X axis, which is total
    widgets sold. Because that's your target -- a certain quantity of widgets
    you can sell for any given level of investment in stores, people,
    advertsing, and so on. Below that quantity, you're on the way to clearing a
    profit; past that quantity, you're losing money on each sale.

    So that's it! Manipulating prices gets you nowhere as a businessman, because
    in a competitive market environment the price of goods is out of any one
    person's control -- it is for all intents and purposes "given" by the
    aggregate of supply and demand. All that you can do to affect your total
    profit is to to either invest in the resources needed (human and otherwise)
    to increase sales to the optimal level (and no more!) or innovate in such a
    way as to reduce per-unit costs. That, or get into some other business
    altogether, of course.
     
    impossible, Dec 6, 2007
    #66
  7. Squiggle

    Alan Guest

    Hi Impossible,

    That's good stuff too.

    So, what is the Marginal Cost per widget in this example?

    Thanks,
    --

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    Alan, Dec 6, 2007
    #67
  8. Squiggle

    impossible Guest

    MC is not a single number but rather changes as the quantity of widgets
    increases. This makes sense because fixed costs are front-loaded while the
    costs of producing/selling additional units is typically u-shaped -- falling
    in the beginning, for instance, as marketing strategies are improved and
    staff steadily gain experience, but then rising again as expansion of sales
    requires additional investments in staff/advertising/floorspace etc. The
    trick to maximising profitability then is to operate as close to the MC=MR
    intersection as you possibly can without going over -- then you know that
    all those widgets you sell are actually earning you money.
     
    impossible, Dec 6, 2007
    #68
  9. Squiggle

    Alan Guest

    Hi Impossible,

    Okay, so then what would be the MC for the first unit in the store,
    immediately after I have set up the shop?

    If it helps, calculate for the first unit, and for the second unit.

    Thanks,

    --

    Alan.

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    Alan, Dec 6, 2007
    #69
  10. Squiggle

    impossible Guest

    I've done all I can to explain the concept. Time for you to do your own
    homework.
     
    impossible, Dec 6, 2007
    #70
  11. Squiggle

    Alan Guest

    Hi Impossible,

    I take it the penny has finally dropped as to where you were
    misunderstanding the concepts.

    Sometimes you just have to work through a numerical example to see how
    the theory actually fits in!

    Regards,

    --

    Alan.

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    Alan, Dec 6, 2007
    #71
  12. Squiggle

    impossible Guest

    Yeah, right.
    But I guess you're too intellectually lazy to bother.
     
    impossible, Dec 7, 2007
    #72
  13. Squiggle

    Alan Guest

    Hi Impossible,

    Let me help you out:

    MC (Second and every subsequent unit) = $1.50

    Since you were suggesting that retailers should post their lowest
    price and that it should equal their MC, then you would suggest they
    post a price (MR) of $1.50.

    At that price, they will lose money and go out of business.

    If you are still struggling, please do feel free to post back.

    --

    Alan.

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    Alan, Dec 7, 2007
    #73
  14. Squiggle

    impossible Guest

    I've wasted too much time on you already. I'll leave you to your doddering
    little world.
     
    impossible, Dec 7, 2007
    #74
  15. Squiggle

    Alan Guest

    LOL

    --

    Alan.

    The views expressed are my own, and not those of my employer or anyone
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    My current valid email address is:



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    Alan, Dec 7, 2007
    #75
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