Dear Ubn,
The current policies are tearing down American corporations.
The next tax day you will be fully up to your eyeballs in data on why this is all foolishness.
1 Like
How do you know the price isnât set by the highest cost supplier? The store then prices the lower cost brands at the same price, and pockets the extra margin.
Kroger sells a 2L bottle of house brand cola for $1, but a bottle of Coca Cola costs $3.49. Basically the same stuff in each bottle. Coke charges more than three times as much, because they think they can get it.
When I was in grad school, my marketing class ran a soda pop marketing simulation game. The prof talked about âcorporate mission statementsâ. Most of the team leaders in the pop game recited their âmission statementâ: blather about âhigh quality productâ. I laffed. The âmission statementâ was the criteria for winning the simulation: make the most profit.
Steve
The costco potatoes have been $7.99 for the 10 lb bag for many months now, probably over a year. There have been at least 3 suppliers that Iâve seen over the year, and we buy at least one bag a week.
I suspect costco works kind of like walmart works. They tell the suppliers âwe are selling it at $7.99, therefore we will pay you $6.77 for them. Let us know when you can deliver X,000 bags of them.â Then each supplier does some math, and if it is worth it for them that week, they deliver, if they have other customers that week that will pay more, perhaps they donât deliver, and a different supplier delivers. And if no supplier is willing to sell at that price, then costco is willing to not carry potatoes that week. I can only recall one week in the last few years when costco didnât have potatoes. Though there are MANY other things that they sometimes donât have. For example, three weeks ago they didnât have 9x13 foil pans. And that happens a few times a year. Their foil pans are far (FAR!) less expensive than anywhere else. They charge about $9 for 30 pans, most other places charge $4.99 for 3 pans or 5 pans. I used to get a box of 100 pans from Sams club for $30, but they donât sell those anymore.
1 Like
Theyâre not fungible products, though. Even though the generic and the Coca Cola are âbasically the same stuff in each bottle,â itâs not the same product. The branding matters. Which is why Coke spends so much on advertising - it works.
Thatâs an entirely different scenario than two identical trucks being offered for the same price, despite being sourced from different locations. We would never expect them to be priced differently based on their different sourcing or production costs - that just doesnât happen for fungible goods.
6 Likes
My point is, the price is set by the higher cost good, and the company pockets the extra margin on the lower cost good.
Steve
2 Likes
How is that shown by your example?
Kroger charges two different prices for the two different goods - the house brand is much cheaper. The price isnât set by the higher cost good. It certainly costs Kroger far more to buy a bottle of Coke for resale than to produce/buy a bottle of the house brand, but they canât charge the same price for their house brand as the more expensive Coke.
1 Like
I was referring to the pickup truck example, but the same would be true of the potato or tomato examples.
That Coke can charge more than three times as much for itâs mix of fizzy water, coloring, and corn sweetener, than Kroger does, is a testament to the gullibility of consumers.
Steve
But again, that doesnât seem to be true of the potato or tomato examples. If the products are truly fungible, they are sold at the same price. The retailer doesnât sell identical products for different prices based on their acquisition costs. If the standard 5 lb bag of house brand potatoes is filled by three or four (or many) different suppliers with different prices, the price doesnât change depending on who supplied the potatoes - theyâre all the same price. If Kroger has different bottlers that charge slightly different costs for each bottle of house brand cola, they donât have different prices on the shelf. Etc.
Which is why two identical Ford trucks donât have different prices, even though they might have different costs based on country of manufacture.
Whether a testament to the gullibility of consumers or not, Coke and house-brand cola are not identical fungible products. Which is why theyâre not priced identically.
4 Likes
One last try. You have two identical products. One cost you $1.00. The other cost $.75. You sell both for $1.15 ea. You make 15 cents on one, and 40 cents profit on the other. That is the point the President of the UAW made: consumers do not enjoy a lower price on Mexican built cars, because the automaker pockets what it saves by using Mexican labor. To believe that automakers are basing their price on the average cost, you would need to believe that automakers willingly sell their US built cars below cost. I find that unlikely. As offered above, offshoring production is a profit grab: selling lower cost goods for the same price.
Steve
1 Like
Not quite. Coke and Pepsi and Crown Cola and etc. all do taste (barely) discernibly different. It is not the gullibility of consumers that is the problem, but rather a long time wealthy nationâs cultural idiocy and egoistic pride that ranks âtasteâ and prideful habit high above financial sanity.
My puritanism is showing, with my form of pride.
1 Like
But thatâs not true.
In your hypothetical, I have an average cost of 87.5 cents for my two items. I sell them both for $1.15, for a gross margin of about 30% - enough to cover my COGS, operating costs, and some amount of net margin. But if both goods cost me $1, then I would have to sell them both at $1.30, instead of $1.15, in order to yield the same gross margin. Having lower-cost goods in the mix lets me keep my average prices lower while yielding the same gross margins, without having to consider a scenario where Iâm selling below cost for my domestic goods. If I had to pay more for my cost of acquiring the goods, I might have to charge a higher price.
2 Likes
One last try. Producers donât just get to pick a price out of thin air. They have to take into account what the costs are, yes, but also what the competition is charging, what they think the consumer will spend, how much marketing they need, dealer support (in the case of autos, slotting allowances for Coca Cola and other branded products in the supermarkets), and all the rest of the variables that go into the calculation.
The number they come up with is generally a pretty static figure, absent sales to move stale inventory or other external considerations. For two identical products with differing costs, they quite likely take less margin on one and more on another and call it a day. That might not be true if the costs are so widely variant that one is causing a loss, but generally âsame price.â
I had a newsletter-by-fax business back in the before times. My costs varied depending on where you lived because long distance phone pricing back then was distance dependent. (My writing/wire service/etc costs were all the same, obviously. Produce once, ship many times.) My price to subscribers was the same whether you were on the east coast or west coast, or even international, which was hugely expensive back then, but we just sucked it up and sent it out.
2 Likes
Wow. Just Wow. I never heard of that, but you were a significant antecedent to our times.
When I took over the publishing company that became my main lifeâs work, one of my early steps was outlawing print fax machines, let alone telephone based ones, and shifted everything to digital.
2 Likes
Maybe these negotiations are happening in private. Public masternegotiating is frowned upon, even illegal in some parts.
2 Likes
Some in the US are on their knees groveling to China and other countries that the above doesnât happen.
It will take several months but the above is happening slowly but surely.
More savings today
I must not have expressed myself clearly. You are setting your price to have a 15% margin on the more expensive item. If you set your mark up at 15%, on the 87.5 cent average, you are selling the $1 items for $1.00625. That isnât worth getting out of bed for. If your 75 cent vendor has a production snag, you are in the kimchee, with $1 product selling at $1.00625.
Steve
I covered that in the pickup truck example. All Ford F-series are built in the US. The F-series is also the most popular. So, Ford sets the price. Chevy can fatten itâs margin by sourcing trucks from Mexico, and pocketing the money not spent on labor, rather than passing the savings on to consumers.
Steve
Or, they can use the savings to lower their price to compete with what you tell us is âthe most popular truck madeâ (no matter of what origin.)
So Chevy would like to do both, but more likely they will lower the price to compete more robustly, gain share, and build profits with more sales rather than fewer sales with slightly better margins.
Not always, I admit. Some people are short sighted, and in a niche category that can be a reasonable strategy. When youâre competing with the big dog in the big dog category, you go for sales and share.
Right - which is why the price is set at something that gives you the margin you need over the average of your supplier costs, not just one or the other. If youâre charging $1.15, and your average cost is 87.5 cents per item, then your margin is 30% - not 15%.
If you didnât have a low-cost supplier, and all your product cost $1, youâd have to charge $1.30 to maintain that 30% margin. But because you can get half your product at 75 cents, youâre able to charge $1.15 instead. You charge the same for all of your sales regardless of whether itâs sourced from the high or low cost producer, and having the lower cost source lets you lower the price from what it would be even though you charge the same for the product no matter where it comes from.
That has not been the trend. The trend has been price and margin escalation. One tactic being to abandon segments where lower prices and margins are found, then closing factories and laying off tens of thousands of people to âright sizeâ to the new, lower, volume, of higher price and margin products.
Consider this graph of big three market share, from 1961 to 2016. Ford, for instance, has gone from a market share of some 27%, to about 15%
And the downtrend has continued, falling to 13% share in 2023.
https://www.statista.com/statistics/239614/vehicle-sales-market-share-of-ford-in-the-united-states/
And what does the CEO of Ford Motor have to say? He says Ford âwill be the Porsche of off roadâ. Porsche is known for both high prices, and incredibly fat margins. Farley doesnât care about volume.
Steve