Why not to sell things for super cheap and instead try to make a profit. For dummies.

Let me make something crystal clear.

There are costs associated with every single manufacturing process. If the tooling produced in these processes is sold below those costs, money is effectively being burned.

In almost all circumstances, it’s better to not sell the tooling at all than to sell it under cost. And also to not produce tooling in such small quantities that the costs threaten to overwhelm the remotest possibility of making a profit.

Businesses exist — in the end — to make profit. If there was no profit, there would be few businesses. What we do is almost tangential to the fact that there must be a profit. If there is no profit, things must go, such as jobs and perks and eventually the business itself. If you cannot understand the costs associated with production, understand this: when you sell tools below cost, you’re effectively robbing yourself of your job. You’re robbing your heart to spite your little toe.

This seems, to my mind, pretty elementary. Yet I’ve found many, many people who simple can’t grasp the idea. Look, a multi-million dollar machining centre and what it produces don’t just appear out of nowhere. They have to be bought. And in order to be paid for, they have to break even. And in order to pay for all the other surrounding things such as lights and air and employees and heating and material and computers and all that stuff it has to do more than break even. And at the end of the day, after all those stakeholders are paid, the profit is that little bit of fat the people who worked hard to create the company get to do with as they wish.

Simplified? Yes. Yet, it’s still too complicated for some people.

I want to say something about genetics and the film Idiocracy, but I won’t.

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Posted September 14th, 2007 in main. Tagged: , .

3 comments:

  1. Roger:

    So, seriously, there are people who have trouble grasping this? I feel like I just read an entry telling me that if plants didn’t get water, then they wouldn’t grow.

    Duh.

    September 15th, 2007 at 5:47 am
  2. Tim:

    Reminds me of people who complain about the evil pharmaceutical companies who ‘charge too much’ for drugs…. without considering the millions of dollars that go into the research, and the comparatively few people who will actually USE the drug.
    They also forget that they DO have an option to NOT take the drugs at all.. if they REALLY wanted to protest the prices…

    September 16th, 2007 at 7:54 pm
  3. daniel:

    Roger, I don’t know if this has never been adequately explained to some people, but as obvious as it might seem, those people have been insulated somehow from this obvious truth.

    Tim, I know exactly what you’re talking about, although the pharmas are by no means starving for money and could do more to, say, get needed drugs to African nations. Though of course I take your point, and what I’m talking about is a separate issue :)

    September 17th, 2007 at 12:13 pm

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