By-Product Pricing
It refers to the process of determining the price of a secondary or incidental product that is generated during the production of a main product. It’s like getting a bonus product along with the one the company actually wanted. Imagine you’re running a bakery, and your main product is delicious bread. However, during the bread-making process, you also end up with some leftover dough that can be used to make smaller rolls or buns. These rolls are considered by-products. By-product pricing involves deciding how to price these additional rolls. When setting the price for the by-product, there are a few options you can consider. One approach is to assign a price based on the cost of production. This means taking into account the ingredients, labour, and other expenses involved in making the rolls. Alternatively, you can price the by-product based on its market value. This involves looking at the price that similar rolls are being sold for in the market and using that as a benchmark.
By-product pricing is important because it helps a company make the most out of its production process. It allows the company to monetize resources that would otherwise be discarded or underutilized. However, it should be kept in mind that by-product pricing can vary depending on factors like market demand, production volume, and the overall profitability of the main product. Additionally, by-product pricing can also be influenced by ethical considerations and sustainability goals. For example, if your bakery aims to reduce food waste, you might choose to price the by-product more affordably to encourage customers to purchase it and prevent it from going to waste.
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