Thursday, 20 February 2014

Making money out of paracetomol and aspirin

The cost of a pack of 32 paracetamols over the counter can be as little as 25p. That works out at less than 1p per tablet, and that includes a box, a leaflet and the plastic and foil packaging. Not much of a margin in this! So what's the catch? I also looked at the cost of a white sliced loaf: 47p in a well known supermarket! Think about the costs in producing a loaf at home, using your own ingredients, oven and time! Finally, what about baked beans, the staple of students (in my day at least): 24p a can. What's going on! There's the cost of the can, the beans, their preparation, energy costs and the canning process itself, not forgetting the advertising costs. Well of course it comes down to where you buy them from, where they are manufactured and how many you can sell and a few other factors. 

Compare this with Chanel number 5, retailing at about £200 for a 30ml bottle! Or a a 3 year old Ferrari for about £200 000. Clearly pricing is a complex issue. What isn't complex is to work out the cost of manufacturing of a particular item. Then you factor in the savings associated with scaling up production (typically ingredients cost less per unit when you buy in bulk). However, this isn't the only explanation, since even allowing for the savings on costs of manufacture by outsourcing production to countries with low labour costs, for example, sometimes the sale price represents a loss. This is only possible for a limited period, where you are trying to get customers hooked on your product so that they remain loyal when you increase the price. Alternatively, a large supermarket chain may draw in customers to buy baked beans or bread at loss leading prices, knowing that they will spend more than they bargained for on items they don't really need. Stores that sell multiple items can spread their profit margins in very creative ways. 

Think about the psychology of marketing when planning your business. Why do supermarkets surround the check outs with sweets? That's the place where you linger, where your children start getting restless. Need I say more! The other issue is how do you position your product which you know is high quality when your competitors are cutting corners to reduce the selling price? This is when you need to think about marketing and branding. Again think of how Ferrari can sell a vehicle to get you back and to from work with a fuel consumption that is probably (I don't speak from experience here) 10 times worse than a Ford Focus! Then there are the tyres to replace.....

Let me have some feedback on your ideas and how you are getting on. Why not look at some businesses and see how they market via the internet. Next I shall say a few things about the different ways in which start up companies raise funding to get started. 

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