The growing power of the consumer

Just a short note that in light of the tumbling economy, the consumer, that is you and I, are gaining the power to demand reasonable prices for the objects which we desire.

Homes is a good example.  Due to the foreclosure problem, the cost of homes up for sale is dropping drastically by the day.  A home that mortgaged for 60k, 5 years ago sells for 30k now.  That’s the power of supply / demand business; of capitalism.  I could go into why this is the case and why I feel that the housing market was overvalued in the first place.

Cheaponomy is the keyword that is being used to describe those people who are demanding stuff on the cheap.  The thing is, it is better for a company to sell something for little to no profit or lost profit to not selling their products at all.

To clarify:  Here’s a widget, it cost me 10 dollars to make it.  I sell this widget for 20 dollars and only sell 25 parts of the 100 that I made.  I then decide that over time I drop the price of my widget and manage to sell another 25 parts for prices between 20 and 10 dollars.  If it is imperative for me to sell all my widgets but I can no longer sell them to make money, I have to sell them for less.  This will, of course eat into the previously earned profits but I think it would take a while before you’d actually reach the point where you’ve lost any money.

I’ll continue with this tomorrow with some math to support my idea.

Qty sold    Price    Income    
25          20       500    Making Money
1           18       18    
2           16       32    
3           14       42    
4           12       48    
5           10       50    Breaking Even
7            9       63    Loosing Money
9            8       72    
11           7       77    
13           6       78    
20           5      100    
100    Total       1080    Total Income
                   1000    Cost to Make
                     80    Profit

Based on making a widget that costs 10 dollars to make and starting to sell it for 20 dollars initially and slowly decreasing the price in order to remove the widget from inventory until there are no widgets left.

I’m sure there’s some fancy business name for what I have illustrated above but in essence, we the consumers are demanding lower prices for the things we want.  If businesses want to stay in business, they’ll have to bend to that demand and accept lower profits.

SO – keeping this in mind, when you hear about all these businesses like Intel cutting their profit reports, it’s because they’re reacting to the demands of the customers by selling their stuff for less.  They’re still making money, just not as much and that doesn’t mean anything to you and I.  Quantity sold is more important than quantity of profits;  At least as it extends to manufacturing.

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~ by aeroslin on November 14, 2008.

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