In business, a lot of people prefer dealing with products that will bring high mark-up, up to 30% while others prefer dealing with products with low mark-up, up to 5% with more sale volume. The both are doing business and both are making money. Mercedes Benz produce luxury cars, vans and trucks that are sold at a very high price while Walmart sells perishables and retail goods at a very low price.
It is no secret that organized crime in America takes in over forty billion dollars a year. This is quite a profitable sum, especially when one considers that the Mafia spends very little for office supplies. – Woody Allen
It has become a usual assumption that low prices always attract customers while high prices turn them away. In the opposite way, people believe that higher piece means a higher value for the product.
In January of 2006 Waterstone’s bookstores executive resigned after the company in one year went from a profit of £13.5 million (which was quite impressive) to a £300,000 loss. This was because the store was selling for as low as 60% discount to customers and had a high sales volume. This same tactics was the cause of their profit the previous year. In the same year WHSmith who was a competitor to Waterstone’s made a profit of £80 million and the company attributed the profit to the refusal of selling at a cheap price. The management insisted that a higher price margin is more lucrative than a high sales volume.
Contrary to this, Bernardo Trujillo in the 1950’s said “Percentages aren’t put into a bank, only money is put into a bank.” Selling perishable items may only allow for a 2% mark-up, but under the right conditions hundreds of items can be sold in a single day thereby generating a lot of instant cash while luxury goods aren’t bought everyday by the same person. With little money made on each of the commodity, what gives a higher profit is the high volume. The model is ‘Pile it high and sell it low’, which is buy in bulk, add a low profit margin, and sell to customers.
Sales volume, profit margin, high prices and low prices. All these are models for businesses and a lot of businesses use them to the advantage. A lot of business believe in the business model that says produce/buy in bulk and sell at a low price while depending on sales volume, other businesses follow the model of high price not being bothered about the sales volume as higher price means higher value.
What is your take on this models of business and which is the best for good business.