Question

You have a small decoration business primarily making custom paper mache piñata’s. Monopolistic Competition. Each customer has unique custom order, therefore it is very difficult to figure out the marginal cost of each output. You charge a price of $15 for any small two foot by two foot piñata’s. Without marginal cost, how can you check to see if the small piñata’s were profitable?

Answer 1

About pricing:

A monopolistically competitive market allows you pricing differentiation to some extent. When your products are unique to the degree that it is very unlikely to make the same design ever again, your existing pricing strategy of charging all customers the same price of $ 15 is not something recommended. Better make three categories, such as Brand C for $13 each; Brand B for $15 each and Brand A for $17 each. You see the band is narrow here and should go well with the customers. The designs which are new and latest, label them Brand A. The designs which are already doing good on sales, label them Brand B. And those requiring less time and cost to make, label them Brand C.


In a monopolistically competitive market, ways to put a check on the direct cost:

1. The cost of base paper used may vary, but their average cost (for each 100 units produced) must not exceed a well defined limit - Say $2 per piece
2. Consumables costs: Even though they are direct costs, they are difficult to ascertain for each unit individually. Maintain the record of monthly costs incurred and divide them by number of units produced in the same period. This way you will come to know about the average cost incurred on each unit.
3. Packing cost: Packing material should be disposable and inexpensive to the extent possible. It could be made from recycled materials for keeping the costs under check.
4. Delivery cost: This will vary with every customer served. Better keep the delivery free of cost if the destination is within a certain local limit (say up to 3 kms around) and charge extra for longer travels.
5. Labour costs: This is another area for improvement. Better to link the wages with quantity produced and discourage the practice of handing out fixed monthly wages. Or at least use a combination of both.

Ways to put a check on indirect cost:

1. Electricity costs: Keep a watch on the monthly bill that you pay every time. Link it with the number fo days you operated or number of units you produced.
2. Administrative costs: If the administrative workload is simple and not too much, an idea of outsourcing a part of it can be a good idea. Instead of yourself hiring a personnel yourself, sometimes it is better to get a practicing professional do it for you more accurately and with a increased sense of responsibility.
3. Marketing costs: To the extent possible, avoid distributing printed media such as brochures, pamphlets, teasers, etc. Showcasing your all new designs on your website and social media is a good way of reducing the marketing costs.