Don’t Count the Profits Until All the Stocks are Sold

 

Recently, I spoke to someone who expressed great happiness in successfully selling products online for a good profit. The person had procured batches of various products for sale at a seemingly low price. After a good markup, these products were offered for sale on some online platform. The person showed me the reasonable range of the products available for purchase.

When I inquired further, the person mentioned that the stocks yet to be sold were kept in two boxes. Herein is the crux of the matter. This person’s joy at being able to sell a product for a good markup would be a cause for celebration if the entire lot could be sold for the same price. In some cases, this could happen. In most cases, a certain percentage could be sold at this lucrative price. Another percentage at a lower price and so on. I explained this process in an earlier blog titled “What are the profit margins for your products?”

The reason for revisiting this topic is to stress the need to dynamically price the products so as to maximize the profit. What this means is that if, after a short period of time, you are no longer getting orders for the products at the desired price, you should start to reduce the asking price. However this has to be done quickly especially for certain products which either go out of fashion or face stiff competition or just the result of waning interest by consumers.

However, you may want to manage this price transition creatively. One way is to leave the price as it is but to offer the purchase of a second item at 20% less. This is equivalent to a 10% discount on the price. Another way could be to offer a voucher of a certain value which could be used to purchase your other products. If the products are still not moving as fast as you expected, you need to further revise the price quickly.

The danger of not doing so is that the unsold products tie up your cash. Furthermore delays in selling them would lead to further price declines and eventually lead to losses. Once you reach a certain threshold when it is imperative to get rid of the stock, the price that you paid for it no longer matters. It is sunk cost. What matters is to get rid of the stock at whatever price you can get before its too late.

There is another benefit in this approach. Selling your products at a good markup meant that the profits are also good. Thus your profit and loss accounts would show a good profit before tax. This means your firm would have to pay a sizeable tax bill even though the cost of the unsold stock remained in your balance sheet. If you get rid of more stock even at a loss, then the profit before tax could be significantly reduced. Many firms fail to see this need and end up going bust with all the cash tied up in old unsaleable stock.

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