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Comment by b112 | Hacker News Reader

Min/Max pricing theory?

Selling 10 units at $10 profit is far far better than 100 units at $1.50 profit. Maybe even $2 per.

Why?

Because the more you sell, the more support, sales, and marketing staff you need. More warehouses, shipping logistics, office space, with everything from cleaners to workststions.

Min/Max theory is exceptionally old, but still valid.

So making a crappier product, with more profit per unit, yet having sales drop somewhat, can mean better profit overall.

There are endless ways to work out optimal pricing vs all of the above.

But... in the end, it was likely just pure, unbridled stupid running the show.

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The economic notion is called marginal profitability. Better sales are a good thing if the marginal profit is positive, ie, each extra unit sold still increases the overall profit, so in your example it's still profitable if the new model brings $1.5 profit per unit, and you stop only when the marginal profit per unit turns negative.

In tech the model is often misleading, since the large investments to improve the product are not just a question of current profitability, but an existential need. Your existing product line is rapidly becoming obsolete and even if it's profitable today, it won't be for too long. History is full of cautionary tales of companies that hamstrung innovation to not compete against their cash cows, only to be slaughtered by their competition next sales season. One more to the pile.

Shouldn't you be pricing the increased cost of support/sales/marketing into your profit calculations?

I'm guessing you mean for the crappier product, and sure that's a consideration.

I haven't looked at them in years, but there are formulas for all of that. EG to help you work out if it makes sense.

> So making a crappier product, with more profit per unit, yet having sales drop somewhat, can mean better profit overall.

This will never work in a competitive market like for NAS. The only thing that will get you higher profit margins is a good reputation. If you're coasting by on your reputation, sales and customer experience matter. Less sales one quarter means less people to recommend your product in the next one, which is a downward spiral. A worse customer experience obviously is also a huge problem as it makes people less likely to recommend your product even if they bought it.

They went for a triple-whammy here from which they likely won't recover for years. They now have less customers, less people who are likely to recommend their product, and their reputation/trustworthiness is also stained long-term.

Crappier products at higher margins only works if you're a no-name brand anyways, have no competition, or have a fanatical customer base.

This seems to be the model that Broadcom is going with VMware.

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