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What does "Below Cost" Mean?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 12 November 2016
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    Conjecture Corporation
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"Below cost" is a term that is used to identify the sale of a good or service for an amount below the expense involved to create that product. The term is often utilized in retail settings in which goods are sold for less than the seller originally paid for them, as a means of attempting to minimize the amount of loss associated with those goods. Investors also sometimes sell assets below cost, either due to personal financial hardship or the desire to dispose of a security that is no longer worth the original purchase price. The strategy may also be used as a means of generating attention from consumers and ultimately capturing a larger market share.

One common example of selling goods below cost is a retailer who is either discontinuing a given product or who is in the process of closing one or more retail sites. In this scenario, the goods in question cannot be returned to the manufacturer for any type of credit. In order to recoup at least a portion of the funds invested in the initial purchase of those goods from manufacturers, the retailer will mark each unit with a price that is below the amount originally paid for each unit. While this move does nothing to increase the profitability of the business, it does allow the retailer to sell off inventory items rather than taking a full loss on them, a move that at least provides some financial benefit.

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Investors may also use the strategy of selling below cost from time to time. This is particularly true when an asset has taken a sudden dive in value. Assuming the investor has reason to believe that the asset will not level off and eventually begin to appreciate in value once more, he or she may determine that selling the security before the unit price drops any lower is the most prudent course of action. By doing so, the investor effectively avoids incurring any additional losses, and can use the funds to purchase a new security that is expected to earn some sort of profit within a reasonable period of time. As a bonus, the investor can use the loss generated by selling below cost as a tax deduction in many cases.

While the concept of selling below cost is often seen as a strategy that is used to prevent further losses, there are situations in which the approach is used as a means of generating some sort of market share increase. Companies may choose to offer one or more products at a loss in order to capture additional attention from consumers. The idea is that once consumers try the products and get to know the company, they will investigate other products in the line. Assuming those consumers begin to purchase additional products from the company, the losses sustained by selling a couple of products below cost is eventually offset by the profits made on the other items. Once the company has increased the clientele and stimulated sales for its entire line, it may even be possible to begin incrementally increasing the prices of those items sold below cost, eventually making those specific products profitable once more.

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