Originally Posted by Curmudgeon
Sorry, but it doesn't help. I think you're reading me or the article backwards. We're not talking about how $10 can add $100 to the price. Instead, we're talking about a savings of $10. A negative number. If something costs $10 less to make at wholesale, how does it end up being $100 less at retail? This is multiples of subtraction. Under normal markup, the part that costs $10 less would simply make the retail cost $10 less. How does it make it $100 less? The fiberglass case being thrown in for free? Is there is some inherent manufacturing technique with fiberglass that saves money over manufacturing with aluminum.
One component of pricing a product is to mark up the product costs based on forecasted sales.
With a low forecast, the markup will generally be higher to meet profit objectives.
Let's assume, that our product with a milled metal case has a total parts cost of $200.
Now, to meet the profit objective for the product, the the company marks it up 400%: parts cost $200 + $800 markup == $1,000 Selling price.
So now, the company decides to use a fiberglass case reducing the parts cost by $20 ($10 x 2).
Our new calculation is: parts cost $180 + $720 markup == $900 Selling price.
Voila! $1000 - $900 == $100 savings.
Admittedly, this is a simplistic example. But many companies will use this as an initial approach -- then test their markup formulae/assumptions
by calculating details -- cost of money, inventory, plant and equipment, handling, manufacturing, warehousing, distribution, sales, G&A... and profit.
I must add that pricing/forecasting is a black art.
When IBM introduced the Selectric "Golf Ball" typewriter in the 1960s it was priced at about $320.
The story was that IBM forecast that they could meet their profit objective with a price of $160.
The IBM board said: "Double it!"
It was a resounding success!http://en.wikipedia.org/wiki/IBM_Selectric_typewriter
Finally, the masters of this black art like Apple and Tim Cook -- likely start the process in reverse with a price and profit objective. Then they focus on the details which will allow them to meet these goals with the resources and risk they want to commit.
Then, they continuously monitor/sample and refine the details to assure they attain their goals as the market changes. Certain things are weighted differently than others -- sex (market appeal), integration with other plans, competition, opportunity, etc.
For example, Apple may choose to use an A5 chip in the iPhone 5 where the A4 would be adequate -- by increasing the use of the A5, Apple gains sex appeal, can reduce the A5 cost and apply that to increased margin on the iPad -- or the ability to reduce the iPad price to stave off competition.