Zero Profit Equals More Profit

Most of the people in business won’t consider the idea of selling at the cost. Why?

Because when the selling price equals the fully loaded cost, there is no money to be made. If we consider the opportunity cost involved, we are likely to be in the red as well.

So by default cost-base marketing is more of a gimmick to draw short term market traction than a lasting, battle-proven strategy.

However, when we want to expand our market share for the product/service we are selling, we may want to revisit the idea of selling at cost.

Let’s explore a few high level questions, though by no means all-inclusive, nor are they applicable to all types of businesses, it is a good starting point to understand the relationship between zero profit and big profit.

1. If we sell at fully loaded cost, is our product/service competitive enough to attract more customers?

That is, if our closest competitor is selling at $10, and our cost is at $8, assuming the quality is equal among the two parties, by selling at the cost, we gain the price advantage to keep our existing customers, take customers away from our competitors, and attract new customers to try and use our product.

2. Would our cost of raw material go down with the increase in purchased volume?

We may get significant discounted pricing if we buy the raw materials in bulk. And the savings can directly translate into profit.

3. Is the market big enough to absorb the extra supply as a result of more units being sold?

Since our goal is to sell more units at breakeven price, we need to make sure the demand of the product/service comes hand-in-hand with the supply. We also need to figure out when we are hitting the market saturation point to avoid overproduction.

4. With more people buying our product/service, would our product/service become more useful to both the new and existing customers to justify a higher price for a premium version later on?

That’s fundamental to the product/service itself. Just like any social networking apps or tools, the more viral it is, the more powerful the product/service becomes. With enough user base, people will be willing to pay for a premium version to take full advantage of the product’s collective power.

At the end of the day, think about this:

Do we want to go big with lower margin or stay small with a higher margin?

Zero profit marketing helps us to effectively size up the market and drive volume, which can turn into manufacturing power, expanded market share, and eventually bigger profit.

   

You may also be interested in the following:

  1. The Hidden Message Behind Low Hanging Fruit
  2. Your Billion Dollar Idea