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Product to Pyramid.

from the accounting experts at Sean M. Hugo, CPA, PC

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Product to Pyramid ...


What do Mattel Barbie dolls and Gillette razors have in common?  Each of these products is part of a product pyramid. Learn how to leverage this technique for the most profitable pricing on your products or services.

 What is a Product Pyramid?

There are many product pricing methods and styles, including cost-plus pricing, competitive pricing and markup pricing. Whichever method you use, the final result should be

Product pyramids consist of multiple product levels with various price points, styles, brands, designs and performance attributes. At the bottom are items with a very low price and margin, which you can sell in large amounts and use to stay competitive. As you move up the pyramid, sales decrease but margins and profitability increase per each item. 

How Should I Price My Products/Services?

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Consider the product pyramid that Mattel has developed with their Barbie dolls.  At the bottom end of the pyramid they sell low-end dolls that compete on price and are available to everyone.  These dolls balance the cosyt of goods sold with a high demand price, to keep competition out. 

At the top end of Mattel's product Barbie doll pyramid are collector dolls sold for $200 or more.  This is the area in the pyramid that Mattel realizes their best profit margins from the Barbie brand.  

Think about a little girl who gets the low-end Barbie doll as a present and develops a relationship with the brand's marketing from early on. When she grows up, as an adult with disposable income of her own, she will have fond memories of playing with that doll as a child and may purchase a collector Barbie doll for $200 or more. Now think, "how can I apply this clever strategy when pricing my product?"

 

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Now think about Gillette razors.  Gillette's customer base was separating into multiple layers.  Gillette understood the power of the product pyramid and took advantage of its power. 

High volume - low margin: You can buy a disposable Gillette razor that is paper wrapped at a kiosk

Low volume - high margin: Or you can buy a Gillette Fusion Pro Glide Power razor. 

This is how tha math works: as you go up Gillette's razor product pyramid fewer of the items are sold but each product becomes more profitable for Gillette. 

The lower end razors act as a firewall to keep the competition out of the razor market ,and protect Gillette's most profitable products - the higher end razors.   

Could My Company Benefit From a Profit Pyramid Model?

Do you have questions on how your company could benefit from the profit pyramid? If you're ready to discuss ways to grow your business with the profit pyramid model, call our office today. 

Our experienced strategic business experts are ready to assess your company and offer actionable recommendations to begin developing your business' profit pyramid, helping you define a product pricing calculator and determining margins that maximize your profits.

 

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