When the local supermarket, operated by a well established organisation opened for business here recently, they had a week long Opening Sale where they sold the very popular nutritional drink, Milo, way below the price that all the other mini markets and grocery shops cost price.
A group of these angry businessmen stormed the office of the local Agent, suspecting that the Agent is practising double standard and offering the Supermarket a lower price for the product. They believe that no one will do business it they know they are loosing money. The Agent was forced to show the price he invoiced to the Supermarket which proved that the Supermarket was indeed selling the Drink at below cost.
How to sell below cost and yet make a profit.
Not for every items found in your shop, mind you. If you do that, you will be heading for Timbuktu within 2 months. Just for one or two very popular items. Take the Supermarket for example.
All big Organisations have an allocated budget for advertisement or whatever they like to call it. They utilise this budget to offset the loss incurred for the item that they loose. Lets say it basically, not taking anything else into consideration but just the cost price and the sales price. Let’s also round up the price for easy discussion. Say they have allocated RM10,000 as Advertising budget for the opening ceremony and lets say they have ordered a consignment of 1000 cans of Nutritional Drinks to sell below cost.
The cost of the Nutritional Drink = Rm10 x 1000 = Rm10,000
Selling at 10% below cost = Rm9 X 10000 = Rm9,000 (assuming one can per customer)
Savings from the budget = Rm1000 (gross loss)
Now, the true scenario is nobody is going into a Supermarket with speakers blasting away announcing great discounts and come out with only a can of Nutritional Drink. So the head up to the first floor where all the latest fashions are being displayed. Parent head for the Toys department where the newest Toys are kept. Consumers might not know it, but apparels and toys are the biggest money earners. Profit margins can sometimes exceed 100%. An equal quality T Shirt can be bought at the night market for a price that is 100 time lower the the one you bought at the Supermarket. Again we take the basic example.
Gross Profit from sale of a T shirt = Rm5
Gross loss from the sale of Nutritional Drink – Rm1000
30% of people who bought the Drink bought a T shirt, total Gross Profit = 300 x 5 = Rm.1500
Gross profit made from attracting people who came for the Nutritional Drink offer = Rm500
So you see, they made money from selling one product below cost. That is human mentality. Whenever there is something real cheap they rush and fight for it. In the end, they are not helping themselves, but the businessman who came up with this gimmick.