Tuesday, April 09, 2013

Buying double glazing - via microeconomics

We're in the market for some double-glazing, replacing windows in the hall plus the patio door to the back garden. We had the salesman from one of the UK's leading double-glazing companies here this morning to give us a quote. There followed a mild form of 'sticker shock' - the number was big! - and though the salesman told us that his company's products were "by far the best, that's why they're so expensive," we decided to get some more quotes first.

If we have three quotes we can try to run an auction to get the best value. So what's the scope of a double-glazing company to reduce its price? Some of their websites advertise "50% discounts"! How on earth can they afford to do that?

We estimated that the cost of labour for installing our two windows and replacement door would be of the order of £500 - or c.15% of the quote we actually received. This means that roughly 85% of the price must cover the products, the hi-tech double-glazed windows/door themselves. Now, making any sophisticated product involves high fixed costs (the factory, advertising, marketing, R&D) as well as the variable cost of labour and materials for the products themselves. These fixed and variable costs naturally need to be covered by the price per unit sold.

However, the marginal cost per unit is far less. Just what it costs in extra materials and manpower to make one additional unit - without regard for paying for all the other fixed stuff.

If the double-glazing company sells a unit at any price above its marginal cost, it will make some money (albeit not enough to justify its whole operation in the longer term). However, better to make some money than lose a sale and make nothing.

So, in theory, we could bid the auction process down until we're in the region of the winning company's marginal cost - this could easily result in a 50% discount ... if the winning company could keep secret the fact it was prepared to sell at this price (or would do so under very limited marketing conditions). Anything so long as it could still hope to hold its regular price in the general market and so cover all its costs and make a reasonable return on capital.

Bring it on, guys! We promise to keep quiet!