It business economics for us.
Pricing is based on demand, inventory, future resupply,
plus speculative replacement cost.
Let’s use magazines as an example.
We plan to buy a 12 month supply of a magazine. We
know how many we sell in an average month, and buy 3 months worth and put in a
purchase order for more magazines to be delivered every 3 months to round the
year. We have room for a 3 month supply, but not 12 months worth. It also
ties up the inventory expense in 3 month periods, not 12.
Our business model is to always have inventory. It does nothing for the customer or company to have out of stock items.
Ideally, the last magazine is sold as the truck delivers the
next batch. All is great.
Now demand goes absolutely crazy. We’re burning through our
inventory 10x faster than we planned. There is a true panic taking place
Pricing is used to slow sales, and maintain inventory
levels. You can see pricing go up sometimes several times in one
day to slow sales. We want to have inventory until our next shipment arrives.
We calculate the sales vs. time, and do our best to have inventory until we are
resupplied. The customer is now competing with other customers for the same magazine. At $10 each, every single one would be gone within hours. At $40 a piece, they may be around long enough for a customer to buy one or two before they are all gone, or we get more in.
To stay in business, we need products to sell. As a
customer, you want products to buy.
Then there’s speculation, just like gas prices. How
much will it cost us in the future to buy that same items? We sometimes
look at the worst case scenario, and price items high.
Right now, there’s no inventory to be purchased quickly at
decent prices, so we have to wait for purchase orders to be fulfilled.
Manufacturers are still making products, but it takes weeks to get it to their
distributors, and then to us.
Now this sound all doom and gloom, but it’s not. The
exact opposite works too.
We have 40,000 magazines on the shelf, and sales are a
trickle. Then next shipment is due in 10 days. Demand is low, inventory
is high, and we need room for the next shipment. To make room, we
slash the price and hope they move out quickly.
This has happened in the past. No one was complaining when
we had a glut of magazines and sold them off at $5.00 a piece.