OK, this is an easy one. The $.10 part is the loss leader (unless you are selling a whole, whole lot of them) and the $1 part is what allows you to make enough profit to keep your doors open. It is all a matter of supply and demand as well as fixed costs. Assuming it costs me $100,000 a month to keep my manufacturing plant open (for lights, raw materials, component inventory, etc.), I had better sell enough parts each month to make back what I spent. If as a manufacturer I make $.10 profit on each $.10 part and $1 profit on each $1 part, I need to sell 100,000 of the dollar part or 1,000,000 of the $.10 part or some combination there-of. In many cases, it would be easier to sell 100,000 of the $1 part than 1,000,000 of the other.
This idea basically works its way down the distribution chain. The Distributor has their own fixed and variable costs they need to cover (lights, payrol, shipping, inventory, taxes, etc.) as well as the end Retailer. Remember that each level in the chain had to pay the higher price from the previous entity in the chain (i.e., the Retailer paid $3 for the part that cost the manufacture $1 to make). The gross profit for each piece needs to go up at each level because each level has the ability to sell fewer products (i.e., even though a manufacturer can sell 100,000 widgets globally, a local Retailer might only have enough customers to purchase 10 widgets per month). As an end Retailer, I am carrying the $.10 part strictly as a courtesy to my customers since I may actually loose money on it. Even if I sell it for $1, my gross profit is probably only $.30. As soon as you figure in the cost of storing/displaying it, the payroll cost of the salesperson that rings up the sale, and the per transaction fee that VISA charges me, it may have actually just cost me $.50 to sell you that $.10 part
!!!! What would keep my doors open is that while picking up the $.10 part you also decide to buy a couple of $20 components to go with it.
As an aside, you can also view your question as "Why should I pay the waitresses an 18% tip at both Denny's and Ruths Chris when my bill at Ruths Chris is 10 times higher than at Denny's?". I personally don't think I would ever want to go back to my favorite high-end restaurant after leaving the wait-staff the same $3 tip that I left at China Buffet the night before
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Julian
www.sedonaskysound.com
