Every product and every deal needs a floor: a price below which you will not go. Without one, discounts and special orders slowly eat the margin.
Three floors
There is not one price floor but three, and each is right for a different decision.
| Floor | Price must cover | Use it for |
|---|---|---|
| Variable-cost floor | Every cost that rises with the sale | The absolute minimum. Below it, each sale loses money |
| Full-cost floor | Variable costs plus a fair share of overheads | Normal pricing. Below it, the business cannot pay its way |
| Target price | Full cost plus the profit you need | Your list price and quotes |
| Rasoi Ratna: 200 g namkeen, wholesale | Per pack |
|---|---|
| Variable-cost floor (honest costing, Chapter 2) | ₹25.45 |
| Full-cost floor (adding about ₹7.50 of overheads) | ₹32.95 |
| Target price (10% profit on price) | about ₹36.60 |
| Price actually received | ₹36.00 |
When a price below full cost makes sense
Sometimes a price between the two floors is a good decision: above variable cost, below full cost. It must be a deliberate exception, not a drift.
| Situation | Below full cost makes sense if… | Danger |
|---|---|---|
| Spare capacity | The order uses capacity that would otherwise sit idle | It becomes the normal price |
| A one-off large order | It adds contribution and does not displace better orders | Other customers hear about it |
| Clearing slow or ageing stock | The alternative is waste or write-off | Customers wait for clearances |
| Entering a new customer or market | You have a plan and a date to reach full price | The plan never arrives |
Holding a price point
Some prices are fixed by habit: the ₹10 packet, the ₹99 meal, the ₹500 consultation. Customers notice when such a price changes far more than when a ₹137 price becomes ₹146. When costs rise and the price cannot, owners change what the price buys.
| Lever | How it works | Watch out for |
|---|---|---|
| Pack size | Fewer grams, pieces or minutes at the same price | Clear labelling; customers' trust |
| Mix | Cheaper inputs where customers do not notice the difference | Never compromise quality or safety |
| Bundle | Same price, fewer extras included; extras sold separately | Customers feeling cheated |
| New tier | A bigger pack or premium version at a higher price | Cannibalising the base product |
| Fewer variants | Cut slow sizes and flavours that add cost | Losing a loyal niche |
Keeping prices in step with costs
Margins rarely collapse in one day. They erode when input costs rise a little at a time and prices stay where they were. A simple review rhythm stops the drift.
- Track your top inputs monthly. The five or ten inputs that make up most of your material cost, with the price paid each month.
- Recost when an input moves. If a top input rises more than, say, 5%, recost the products that use it.
- Review prices on a calendar. Twice a year for most businesses; quarterly when costs are volatile.
- Compare price received with the floors. Flag any product below its full-cost floor.
- Decide and communicate. Price change, pack change, mix change or a deliberate exception, with notice to customers.
| Rasoi Ratna: edible oil | Last year | Now | Effect per 200 g pack |
|---|---|---|---|
| Oil price per litre (assumed) | ₹140 | ₹165 | +₹0.70 of material cost |
| Packs priced before the rise | 6 packs | – | Below full-cost floor |
Questions from the worksheet: Your floors
For your ten most important products or services, write the three floors and the price you actually receive.
Columns in the worksheet: Product · Variable floor · Full-cost floor · Target · Price received · Action
What to remember
- Set three floors for every product: variable cost, full cost and target.
- Go below full cost only on purpose, with a reason and an end date; never below variable cost.
- When the price must hold, protect margin through the pack, the mix and the range.
- Price floor
- The lowest price acceptable for a given decision.
- Price point
- A familiar price customers expect, such as ₹10 or ₹99.
- Shrinkflation
- Giving less for the same price.
This article is adapted from the book. Examples marked “Example” use invented names and numbers; company stories are based on public sources listed in the book. Education only: not investment, tax or legal advice.
