What is a Distress Price
A distress price is when a firm chooses to mark down the price of an item or service instead of discontinuing the product or service altogether. A distress price usually comes about during difficult market conditions when the sale of a particular product or service has slowed down dramatically, and the company is unable to sell enough of it to cover the fixed costs associated with doing business. Utilizing a distress price for a product of service is meant to spur sales to generate enough cash flow to at least cover a company's operating costs.
Breaking Down Distress Price
A company will sometimes choose to mark down an item's price rather than discontinue operations completely because even at a distressed price, those revenues will help with covering some of the fixed costs associated with running the business. However, if the item cannot be sold at a price greater than its variable cost of production, discontinuing the item is usually in the firm's best interests. Companies that employ distress pricing cannot afford to use the pricing strategy as a business strategy. Distress pricing is meant to be a temporary measure while it shifts production, changes its operations or while waiting for market conditions to improve.
As opposed to a sale at a loss, a distress price is the variable cost of an item (the cost of labor, raw materials, energy, distribution, etc.) with a small markup included. In short, it is the minimum price a company can manufacture and sell an item and still turn a profit. Distress pricing may also be referred to as a fire sale. Distress pricing may be applied to consumer goods, but also to investable assets, such as property and securities.
Distress Price vs. Distress(ed) Sale
A distress price may be confused with the term "distress sale," though the terms are not interchangeable. A distressed sale is when property, stocks or other assets are sold in an urgent manner usually under unfavorable conditions for the seller. Distressed sales often occur at a loss because funds tied up in the asset are needed within a short period of time for another, more pressing debt. The funds gleaned from a distressed sale are most often used to pay for medical expenses or other emergencies. For example, an individual may have to quickly sell a piece of property to pay a large and unexpected hospital bill. They are motivated to sell it quickly to cover that debt and therefore price the piece of property aggressively to quickly attract buyers.