By-Product Pricing

By-product pricing involves setting prices for secondary products generated during manufacturing processes. It aims to recover production costs and generate additional revenue through the sale of by-products. Use cases include manufacturing, agriculture, and energy production. However, challenges include managing market demand fluctuations and addressing environmental impact concerns.

Characteristics

  • Secondary Product: Pricing a by-product derived from main product manufacturing.
  • Cost Recovery: Setting prices to recover production costs.
  • Market Demand: Considering the demand and value of the by-product.

Use Cases

  • Manufacturing: Pricing by-products generated during manufacturing processes.
  • Agriculture: Pricing agricultural by-products for sale or utilization.
  • Energy Production: Pricing by-products generated during energy production.

Examples

  • Lumber Mill: Pricing sawdust generated during lumber milling.
  • Sugar Refinery: Pricing molasses produced in sugar refining.

Benefits

  • Profit Generation: Generating additional revenue from by-product sales.
  • Sustainable Practices: Promoting sustainability through by-product utilization.
  • Cost Reduction: Reducing production costs through by-product sales.

Challenges

  • Market Demand Fluctuations: Managing changes in by-product demand.
  • Pricing Strategy: Determining optimal prices for the by-product.
  • Environmental Impact: Addressing environmental concerns related to by-product disposal or utilization.

By-Product Pricing Examples:

  • Lumber Mill: A lumber mill produces sawdust as a by-product during the process of cutting and shaping wood into lumber. The sawdust can be priced and sold to other industries for use in particleboard, mulch, or animal bedding.
  • Sugar Refinery: In sugar refining, molasses is generated as a by-product from the extraction of sugar from sugarcane or sugar beets. The molasses can be priced and sold to be used in the production of alcohol, animal feed, or as an ingredient in certain foods.
  • Petroleum Refinery: Refineries producing gasoline also generate by-products such as petroleum coke or asphalt. These by-products can be priced and sold for use in various industrial applications, including energy production and road construction.
  • Dairy Farm: In dairy farming, manure is a by-product of milk production. Farmers can utilize manure as fertilizer or even consider pricing it for sale to other agricultural operations.
  • Brewery: Breweries produce spent grains as a by-product during the beer brewing process. These spent grains can be priced and sold to farmers for use as animal feed.
  • Power Plants: In energy production, power plants often generate heat as a by-product. This heat can be captured and sold to nearby facilities or used for district heating systems.
  • Fish Processing Plant: Fish processing plants generate fish waste as a by-product when processing seafood. The waste can be priced and sold for conversion into fishmeal, fish oil, or other products.
  • Textile Manufacturing: Textile manufacturers often produce textile waste and trimmings as by-products during the production process. These by-products can be priced and sold for use in insulation, stuffing, or recycling.
  • Automotive Industry: The automotive industry generates various metal scraps and leftover materials as by-products during the manufacturing of vehicles. These materials can be priced and sold to metal recycling companies.
  • Fruit Juice Processing: Fruit juice processing plants produce fruit peels and pulp as by-products. These can be priced and sold for use in animal feed, composting, or extraction of essential oils.
  • Coffee Roastery: Coffee roasters produce coffee chaff, which is the outer husk of the coffee bean. This by-product can be priced and sold for use as mulch, compost, or in specialty products.
  • Poultry Farm: Poultry farms generate chicken feathers as a by-product during processing. Feathers can be priced and sold for use in various applications, including animal feed and fertilizer.

By-Product Pricing: Key Highlights

  • Definition: By-product pricing involves determining prices for secondary products that are generated during primary manufacturing processes, aiming to recover costs and generate additional revenue.
  • Characteristics:
    • Secondary Product: Pricing a by-product that results from the production of a primary item.
    • Cost Recovery: Setting prices to offset production costs.
    • Market Demand: Considering demand and value of the by-product in the market.
  • Use Cases:
    • Manufacturing: Pricing by-products resulting from manufacturing processes.
    • Agriculture: Pricing agricultural by-products for sale or utilization.
    • Energy Production: Pricing by-products from energy generation.
  • Examples:
    • Lumber Mill: Pricing sawdust generated during lumber milling.
    • Sugar Refinery: Pricing molasses produced during sugar refining.
  • Benefits:
    • Profit Generation: Creating extra revenue through by-product sales.
    • Sustainability: Encouraging sustainability by utilizing by-products.
    • Cost Reduction: Lowering production expenses through by-product sales.
  • Challenges:
    • Market Demand Fluctuations: Adapting to changes in demand for the by-product.
    • Pricing Strategy: Determining the optimal pricing approach for the by-product.
    • Environmental Impact: Addressing environmental concerns linked to by-product disposal or use.

Connected Business Concepts

Revenue Modeling

revenue-model-patterns
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.

Pricing Strategies

pricing-strategies
A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.

Dynamic Pricing

static-vs-dynamic-pricing

Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Price Ceiling

price-ceiling
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors. 

Price Elasticity

price-elasticity
Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

network-effects
network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Other Pricing Examples

Premium Pricing

premium-pricing-strategy
The premium pricing strategy involves a company setting a price for its products that exceeds similar products offered by competitors.

Price Skimming

price-skimming
Price skimming is primarily used to maximize profits when a new product or service is released. Price skimming is a product pricing strategy where a company charges the highest initial price a customer is willing to pay and then lowers the price over time.

Productized Services

productized-services
Productized services are services that are sold with clearly defined parameters and pricing. In short, that is about taking any product and transforming it into a service. This trend has been strong as the subscription-based economy developed.

Menu Costs

menu-costs
Menu costs describe any cost that a business must absorb when it decides to change its prices. The term itself references restaurants that must incur the cost of reprinting their menus every time they want to increase the price of an item. In an economic context, menu costs are expenses that are incurred whenever a business decides to change its prices.

Price Floor

price-floor
A price floor is a control placed on a good, service, or commodity to stop its price from falling below a certain limit. Therefore, a price floor is the lowest legal price a good, service, or commodity can sell for in the market. One of the best-known examples of a price floor is the minimum wage, a control set by the government to ensure employees receive an income that affords them a basic standard of living.

Predatory Pricing

predatory-pricing
Predatory pricing is the act of setting prices low to eliminate competition. Industry dominant firms use predatory pricing to undercut the prices of their competitors to the point where they are making a loss in the short term. Predatory prices help incumbents keep a monopolistic position, by forcing new entrants out of the market.

Price Ceiling

price-ceiling
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors. 

Bye-Now Effect

bye-now-effect
The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.

Anchoring Effect

anchoring-effect
The anchoring effect describes the human tendency to rely on an initial piece of information (the “anchor”) to make subsequent judgments or decisions. Price anchoring, then, is the process of establishing a price point that customers can reference when making a buying decision.

Pricing Setter

price-setter
A price maker is a player who sets the price, independently from what the market does. The price setter is the firm with the influence, market power, and differentiation to be able to set the price for the whole market, thus charging more and yet still driving substantial sales without losing market shares.

Read Next: Pricing Strategy.

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