Question (edited for English): Hi Mark, First I would like to thank you for sharing your knowledge about pricing. I appreciate that. I have pricing question. How do you price agriculture machines that are in inventory? For example machines manufactured two years ago and now we need to depreciate them to sell. Regards, D
Answer: Hi D, You may hate this answer, but it always seems to be the same one. What are your buyers willing to pay? Your depreciation schedule, the value you have assigned them as inventory in your books and your manufacturing costs are all totally irrelevant.
You’ve already spent the money to build them. You can’t take it back. Valuation and depreciation are accounting concepts to help investors, managers and governments monitor your business. Willingness to pay is the concept that should drive this decision.
Let’s say you spent $100,000 to build a truck. Finance put it in inventory and valued it at $150,000, the expected sale price. Then finance depreciates it $10,000 per year so after two years the value in the books is now $130,000. Everything in this paragraph is completely irrelevant to your price. The only thing that matters is your buyers willingness to pay.
Now what if the most a buyer would pay you is $80,000? The most you will ever get is $80,000. Your financial valuation doesn’t matter, except that accounting now has to show a loss on selling the truck. However, what if you don’t ever sell it. Eventually it depreciates to zero and you’ve taken a loss on the entire vehicle. The only way to maximize true profit is to sell it at $80,000.
It may be that for tax reasons or for investor reasons, your company doesn’t want to show a big loss. OK. But now you are pricing for something other than profit maximization. If that’s the case, clearly articulate the goals and then determine the best price. Just know if it’s above your buyer’s willingness to pay, they won’t buy.
One challenge you face is figuring out how much someone is willing to pay. Is there a market for used trucks? That’s what you’d be competing with. It seems like the answer in pricing is always, how much is the buyer willing to pay?
Hope that helps.
