Can the product be sold at a price less than its total cost? 🤔
The question is crucial for making decisions.
The answer is (yes) but in certain cases.
And among these cases are not limited to:
✅ If there is an unused absorptive capacity that contains high fixed costs (such as rents, depreciation or fixed salaries), so that the price is sufficient to cover the variable costs and thus achieve a contribution margin.
✅ Pricing to penetrate the markets so that the company's goal is to introduce consumers to the new product, although the production of this type of product may be costly, however, some companies deliberately sell the product at a lower price to achieve certain goals, including changing the way consumers think about the new product to become more acceptable, and often this path is for companies that are not considered a leader in the market.
✅ In the case of selling more than one good or service in one product, so that a service is sold at a low price and achieving a loss, but to sell the associated commodity at a high price and make a profit. For example, the medical equipment sold for a higher price but the installation service is free of charge.
✅ Seasonal fluctuations, at the end of the winter season, merchants sell winter products at a lower price.
✅ The update in electronic devices is very fast so that the emergence of a smartphone with better features every year leads to a decrease in the demand for old technology and this calls for the need to reduce the price even if it leads to losses.
✅ In cases of partial liquidation of a particular sector and to avoid large losses to achieve better absorption of the newer products.
✅ In cases where the storage costs are very high, or rather that the products are subject to unexpected damage, such as dairy products.
✅ In the event of strong competition in the markets, there must be strong offers at low prices to avoid larger losses.
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