Many manufacturing processes, especially in basic industries, produce more than one output. For example, chemical plants often produce a basket of chemicals. This is a result of breaking chemical compounds into smaller molecules. These other products are called byproducts. And by-product pricing strategies can have a significant impact on your profitability.
Two common cases: food waste and recyclable scrap. Food waste can be fed to animals. Many cutting and shaping processes produce scrap. Scrap can often be put back into the machine that created the original roll of material. In the paper industry, we call scrap “broke”. Our broke went back into the paper mill, saving us money on fiber.
By Product Pricing Strategy
By-product sales can be an important part of your profit. Remember most of this stuff was going to be thrown away. Your cost on by-products is effectively zero. This means the typical by product sale is pure profit.
If a significant amount of a by-product is produced, you can sell it as a standalone product. You might be able to get some additional value if you brand it appropriately or otherwise invest in it. Otherwise you can either sell by products on the spot market or salvage them for internal use.
By-Product Quality & Pricing
In the case of recyclable scrap, the quality of the scrap was driven by the original materials. This can sometimes create an opportunity. Naive dealers may look at scrap as single item. However, scrap which comes from better raw materials is often worth more.
I first saw this with a trash bag company. They specialized in making plastic packaging so their scrap was of very high quality. They remelted the scrap into recycled trash bags. These were a premium product of sorts, due to the quality of the plastic.
Legal / Government By Products
Sometimes the by-product is a tax credit! This happened in the paper industry with the “black liquor” environmental incentive. This was a nice bump in manufacturing profitability.
The same thing has happened in other green energy businesses. Manufacturers can earn tax credits during the production of the main product. This can be used to boost profitability.