Designing your product for monetization first, and people second will probably leave you with neither.
Let’s go back to the supply’s graphic. We mention earlier that there is a minimum price that the producer will ask in order to start offering the article or service that will cover the costs and yield a profit and a maximum quantity the seller can offers due to installed capacity and other variants:
The start point here is how the seller calculates the minimum price. By seller I mean the industry as a whole and also a particular seller, this is just an example on how prices are set.
For any given product, you have two different costs: fixed and variable. The former is the cost that exists even if you don’t produce anything: rent, electricity, cost of equipment you need et cetera; the latter is the aggregate cost of producing an article or product: cost of seeds, raw material, variable labour, et cetera. Often these costs may blur, like management salary, or the cost of a marketing campaign, the important thing is that these are the common two divisions of cost that accountants and financial managers know well.
For producers, labour (including management wages) and raw materials are usually the main cost they use on calculations. When you go to Wal-Mart and buy a cheap product, you should know that the product is cheap because Wal-Mart has either a low cost on raw materials (lower quality materials) and also a lower cost on labour (part time employees that don’t receive benefits and work for minimum wage), so Wal-Mart is able to offer you a low cost at expenses of other stakeholders’ benefit.
Stakeholder is defined as an entity that is affected by a process. In any productive chain, usually you have as stakeholders: The Corporation, the government, the customer, the worker and the environment. I will next post a more deep analysis on stakeholders, but for now is important to know that all these entities are affected by any productive chain.
So, how is the price set then for a given product?
P= fixed cost + variable cost + possible profit
For retailers, like Wal-Mart:
P= Lowest possible fixed cost + lowest possible variable cost + maximum possible profit
For retailers like Ten Thousand Villages:
P= fair fixed cost + fair variable cost + fair profit
The last question should be then, what is a fair cost? Francisco Van Der Hoff, in the Congress of Humanity and Social Science at York University (Toronto) stated that the cost of producing any product is composed of three elements:
· True cost of production. This means not only the cost of the raw material, but also the land, salary of workers, and opportunity cost of growing a product instead of another.
· Social cost: The impact and repercussions for the worker and his or hers surroundings like education for children and hazardous working conditions.
· Environmental cost: The cost of soil degradation, fertilizer poured in the land and hazard to the ecosystem, et cetera.
So, next time, think twice before buying a cheap product that may be done at the expense on somebody else’s quality of life.