Walking past my local grocery store today I noticed a sign that that said “Ice cream. On sale.” Now for those of you from the warmer parts of the world let me underline the fact that I am from Norway and in Norway only a very special segment of the populations yearns for ice cream in December. It came to my mind that this grocery store probably had left over ice cream from the recently concluded ice cream season, which they were afraid would go bad if they didn’t sell it soon. But was this really a good idea?
It occurred to me that if they advertised packets of instant hot chocolate instead they would sell much more extra units than if they sold boxes of ice cream. So I thought to myself, let’s assume that a packet of instant hot chocolate cost about the same and have approximately the same margins as ice cream, should they advertise for ice cream or hot chocolate? It is important to underline that if they sell one extra hot chocolate they would have to buy an extra one from the grocer while in the case of the ice cream they would have to throw away that which is not sold. Given that the price and margins for both goods are, well let’s say $5 and 20 %, we can see that only if the sign sells five times as many boxes of hot chocolate than ice cream the store should focus on selling hot chocolate. Let me explain that again.
Since the alternative to selling the ice cream is to throw them away, both the 20 % margin and the already spent 80 % purchase price counts as profit for the ice cream. If the store can sell 1 additional box of ice cream it makes $5, since the alternative is to throw away the box. If the store sells one additional carton of instant hot chocolate it only makes $1, because the alternative was to order less hot chocolate next week, and thus avoiding the $4 expense it would mean to buy an extra unit. Because of this the store should keep selling the ice cream if it is more than 20 % as effective as advertising for the instant hot chocolate. Also you shouldn’t throw food away.
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