Tuesday, February 10, 2009

Part two of greener can be cheaper

Co-op for raw materials

One of the biggest justifications for the higher cost of green products is the higher cost of organic or otherwise green materials.

One of the reasons for this discrepancy between the costs of standard and green materials is something called "economies of scale," a term that basically means that the more you use or make or grow or create, the cheaper it is per element.

The green world is no exception. But manufacturers seem to be forgetting this. Or ignoring it. Or perhaps just acting as though it doesn't apply to their product.

And that can be deadly to green businesses at all levels. Here's an example:

When a company decides to manufacture notebooks with recycled paper, they need to order the paper. Most green products have a limited run (more about why in a second.) So the company orders X reams of recycled paper, makes the notebooks. A price is set, based upon the materials and the perceived value of a green product at wholesale.

A wholesaler or a retail store gets the notebooks, and marks them up again to cover both the cost and the value-added of a green product.

They may also add in a factor to cover the cost of expected unsold product because of the higher sales price of green items. After all, they cost a lot more so people buy a lot less. That was the assumption from the start, when the run size was determined and the prices were set at each stage.

The problem is, that assumption is killing green products and green businesses!!

Let's start over.

The company who wants to make green notebooks finds other companies who are making green paper products. Together, these companies order a significantly larger amount of recycled paper. The paper manufacturer gives them a better price because it's such a large order(economies of scale).

The materials costs are now lower, so the price can be set lower. If the order for paper was large enough, it might be the same as or even lower than standard runs.

Now the notebooks go to the wholesaler or retailer. And because of the perceived value to customers and the lower wholesale price, they order many more. They may get an even better price. The cost to them is the same as a standard notebook, or at least close. Again, economies of scale.

A mark-up to cover anticipated unsold items isn't needed, because these notebooks cost the same as standard ones AND they have the appeal of being green. Easier to promote!

So now the price that the consumer sees is about the same as the regular notebook AND they have a good feeling, too. More notebooks sell, more are ordered and the cycle is in place.

Unless someone gets greedy and forgets that short-term gains equal long term losses, the notebooks sell, the costs remain low and the earth benefits. And we benefit.

For less.


David said...
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Seeker said...

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