What is a By-Product?
Many times, the production process results in the creation of Leftover products. These leftover products may not be as valuable as the main product, but they too have some economic value. Thus, these leftover products, known as by-products can be sold off as independent products in the market.
The revenue generated from the sale of this product can be used to meet some expenses of the business or bring down the costing of the main product. This gives a much needed competitive advantage to the business in the market. Thus, a sale of a By-Product can be beneficial to the business if that is priced correctly and at optimum levels by the business.
Examples of By-Product
It is produced during the production process of the main product. It is the ‘by default’ result of the production process. There aren’t any different raw materials or processes used for the same. To sell it in the market, some processing may be done on it, if required. Thus, it is manufactured and sold at almost no cost.
Some examples from various industries are as follows:
- Sugar beet molasses after sugar refining – can be used as a fodder for animals, while sugarcane molasses is also used as flavoring and coloring agent in some foods.
- Fruit pulp, seeds, and peels that is left over after being processed for fruit juice and related beverages – can be an important raw material for cosmetic industries for their medicinal properties.
- Ethylene – a by-product of petroleum refinery – is an essential ingredient used in manufacturing polystyrene, polyvinyl chloride (PVC), and polyethylene-based products i.e. Plastic products
Common Product Mix Pricing Strategies
Generally, any company will follow one or more pricing strategies for their product mix. These pricing strategies need to be referred so that we can understand pricing later on.
1) Main product + Optional products
E.g. A car manufacturer also sells other decorative accessories like car mats, seat covers, navigation system etc. There is no compulsion on the customer to purchase these but buying them from the manufacturer provides one excellent, seamless product package. Thus, the company has to price these accessories at attractive, competitive prices so that the customer can’t resist the offer.
2) Main Product + supplementary or captive products
E.g. A printer manufacturer sells color ink refills for the printer. To maintain the performance of the printer, it is advisable that the customer uses the printing ink from the same manufacturer. Hence, here the customer doesn’t have much choice but to buy the ink from the manufacturer only. So, the manufacturer can afford to price the ink at premium levels as his customer base is almost guaranteed.
3) Main product + By-Products
E.g. A crude oil refinery extracts at the end of its refining process. That substance is Ethylene – a vital ingredient in manufacturing all the plastic products like polythene shopping bags, PVS pipes, etc. Thus, knowing the commercial importance, the company can actually sell it at lucrative prices.
By-Product Pricing Strategies
Thus, there can emerge the following scenarios with regards to the pricing strategies:
Option 1) The by-product holds commercial significance:
As discussed in the example above, Ethylene is very valuable and it can be sold at premium prices and the profits earned can be used for capacity building for the mainstream business.
Option 2) The by-product has commercial potential but is not significant:
Here, if the resulting product can be sold at some value in the market but that value isn’t too significant as compared to the revenues from the main product; the company should still sell it in the market at competitive prices.
This income is too insignificant to be accounted for under a separate head. Hence, it needs to be recorded under the head ‘Other incomes and gains’ and these proceeds can be used to pay off some expenses, lower the sale price of the main product and strengthen the company’s competitive advantage in the market.
Option 3) The by-product doesn’t hold any value:
Here, it doesn’t have any value in the market. It is simply an industrial wastage that needs to be disposed of. This waste disposal would, in fact, cost some money.
So here, the company has to incur those expenses in waste disposal as per the legal requirements and write-off these expenses in the regular profit and loss account.
Thus, pricing the by-products is an essential strategy for the business. This is because fixing optimum rice levels for the by-products ensures the company of an additional revenue stream at no additional cost and these proceeds can be wisely used to lower the sale price of the main product which will help the company gain more market share in the long run.
