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January 18, 2009


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Alex Francis

I realize I am a little late to the discussion but I am doing research into fixed and variable cost price models. I own a distribution company. We have roughly 50 customers, our annual revenue was 600,000.00 last year with 20% gross. I am the only employee and I would like to hire some help but I don't seem to have enough money to do so. Between the 15,000.00 that I need to keep an inventory weekly and some of the monthly promotions I run there doesn't seem to be enough profit built in for me. Do you have any "formulas" that I can use to determine how I should be structuring my pricing?

Robert Rogers

It is interesting to see how these niche markets are affecting the larger corporations. Now many of them are setting up procurement offices just like the government and are outsourcing work to smaller companies that they originally would have done themselves.

Curtis Gray

And as costs to enter niche markets decrease so profits increase and the need to serve a larger market decreases as well. In other words, a business can do well with fewer customers.

For instance, as costs decrease to produce and distribute, say, high quality music, so music producers need fewer and fewer customers to make a substantial income. A small music producer with, say, 25,000 yearly sales of a $10 CD is bringing in $250K per year. If yearly costs are $15 - 25K per year that is a substantial profit with a very small following. Marketing for the music industry is being outsourced for a fraction of what it costs the big boys.

As for competitive advantage: we have to think of this a different way. Your competitive advantage is likely to be a personality trait moreso than a traditional fiscal or technology advantage. As more people become entrepreneurs (and that is happening in droves) the real differentiator is simply your attractiveness to a particular group.

- Curtis
http://ShipItOnTheSide.com - Build a software startup as a side job.

Ken Kaufman

Great post on the rise and competitive advantage of the variable cost business model, especially with growing niche markets.

One question - does the variable cost model reduce the sustainability of the competitive advantage?

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