Question

Explain the relationship between pricing, volume, costs, and profits. How does Hermes and Rolex make a profit with a luxury target market?

Answer 1

Price and volume have inverse relationship as the increase in the volume of output will cover diverse target audience and higher volume of demand. It will put the downward pressure upon the price. Cost and price has a direct relationship as with the increase in the cost of production, the price of the final product increases. Besides. There is an inverse relationship between the cost and volume. In general, increase in volume, decreases the cost. Profit is driven by the price, cost and volume. A higher margin between price and cost and the higher volume leads to the profit. Here, lower volume, with higher margin of mark-up in prices, will also bring higher profit.
Hermes and Rolex are the companies that offer luxury watches and target niche target segment that considers luxury watches as a status symbol and shows pride in ownership of these watches. On this value proposition, these companies produce watches involving innovative technologies, and other exclusive features and make value based pricing of their watches. It makes them to produce less volume, keep high prices with high mark-up over the cost. It increases the profit level earned by these companies.
Here, these companies face dilemma also to decrease the price and attract broader audience. But, it will reduce the size of the niche audience that draws value due to the higher price of the watches. Hence, these companies continue to attract the niche segment and put higher prices to earn profit.