Most if not all business owners have been faced with increased costs to do business over the last two years. Increased fuel costs, decreased consumer spending and an overall lack of consumer confidence often equals shrinking profit margin for businesses.
What happens economically when one simply raises prices when overall demand is low? What additional strategies can be considered to protect or maintain adequate profits?
In a businessweek article written by Monica Mehta, several strategies are suggested. The first suggestion is to consider introducing lower priced items as a substitute for products that require price increases. A second suggestion is to move production closer to customers. For some international companies, that may mean off-shoring some facilities. A third recommendation is to alter the product by substituting ingredients with lower cost alternatives. A final way that is mentioned is to offer uniqueness in your product by finding a specialty niche in your product market.
What other ways can small business owners can maintain profits when costs are increasing besides those listed?
5 comments:
But Cameron, how do these relate to the material in this class?
The first suggestion is advocating price discrimination.
The fourth suggestion is advocating the development of monopoly power in some niche.
In dealing with food most companies just put less of their product in the container.
So they are offering the same product for the same price if not more for less quantity.
Another way is to think thin. Thin out any excess employees and items that are not producing. Thin the product line and produce the items that are being consumed.
I think the fourth suggestion in the article could also be a good example of advertising elasticity of demand. The example of Kopali Organics and their 50% increase in revenue, based on a marketing campaign that touts the sustainable farming methods of their suppliers, is a great example of a market that has rather high advertising elasticity.
I'm not sure I'd even call that advertising elasticity. Perhaps "green advertising" elasticity.
What I'm thinking is that the fad for "green" is so strong, that many people make dumb choices without thinking, leading to a high measured elasticity.
Without trying to insult anyone, "green" categories are rife with situations in which consumers have made choices that are nothing short of irrational. There's more here than just advertising.
Dr. Tufte makes a good point here. A few years ago I worked for a potato chip manufacturer. One of my duties was to package potato chips on an assembly line after they were fried and cooled. Throughout the day I would take the same chips that came from the same fryer and put them in two different types of bags. One of the bags went to normal supermarkets and the other went to an organic supermarket chain. The organic supermarket chain bags advertised all of the supposed health benefits of the potato chips and they charged quite a bit more for them.
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