Thinking outside the box – pricing for success


Campbell Korff, from Yellow Brick Road, points out that sometimes oils ain’t oils – and how we can protect the value of our investments.

Last week I was reviewing a client’s investment property portfolio and I was able to convince him that taking his negatively geared portfolio into retirement didn’t make a lot of sense and that it was time to shed one of them, so that the portfolio became positively geared.

I asked him what he would be willing to sell it for. Performing some mental arithmetic, starting with his purchase price and adding stamp duty, legal fees, rates and taxes and renovation expenses, he replied: “Well it owes me $750K, so around $900K seems right.”

While this seems compelling logic, it has nothing whatsoever to do with what his property is actually worth. His property is, of course, worth what the market is willing to pay him for it. His ‘sunk costs’ are irrelevant.

This cost-plus pricing fallacy is surprisingly common among both investors and businesses. A business owner making widgets might design Widget MkII, calculate its average cost of production, add his target margin and take it to market. Seems prudent, right? Wrong. The problem is that this ignores the impact of price on volume and volume on costs. A price increase to “cover” increased costs can start a death spiral in which higher prices reduce volumes and increase average unit costs even further, indicating (according to cost-plus logic) that prices should be raised again!

In simple terms, the cost to produce a widget is made up of fixed and variable costs. Instead of asking what price will cover total unit costs, the business owner should ask whether the change in price will result in an increase in revenue which is more than the variable costs of making the extra widgets (e.g labour, materials etc.). If the answer is yes, then the surplus is reducing fixed costs per widget and making the business more profitable.

Pricing is complex and dynamic and should be approached strategically and pro-actively as market circumstances change. Almost every modern household name you cialis tadalafil prix can think of (Apple, Netflix, Virgin, Aldi etc.) have been prepared to think outside the box on pricing and have profited by challenging the perceived wisdom. A good starting point, is to focus on what the customer is willing to pay (this can be improved with marketing, of course) and work backwards to production cost. When doing so, consider which fixed costs are sunk and, therefore, irrelevant to pricing. It’s pricing above the marginal cost of the next widget produced that counts.

Whether that’s a widget or an investment property, strategic pricing will result in higher profits. Email me at [email protected] if you would like more information.






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