Posted in Marketing and Strategy Terms, Total Reads: 674
Definition: Distress Price
Distress Price is price set by an organization for an existing product or service, when it decides to lower down the price of a product or a service, instead of terminating the product or service completely.
A distress price is usually done in a scenario where the product or service is declining and losing marketing share as the customers have another option or substitute. The price set during distress price setting is usually done considering the variable cost and a low mark-up price. In the event, that even a product fails at distress price, it is in the best interest of the company to consider discontinuing the same, before it starts running into losses.
Distress price is usually sum of variable cost and minimum mark-up.
Companies choose to run operations even at distressed price because they know if operations are discontinued they will have no contribution available to cover fixed costs and thus will have to suffer a huge amount of shutdown costs.
Total Cost = Fixed cost + Variable Cost
Distress Price= Variable cost + Minimum Mark-up
On the other hand, if the item cannot be sold at a price greater than its variable cost of production, then it’s best for a company to discontinue the operations.