Special orders: When do you accept to sell your product at a lower price than usual?
Special Orders: When to Accept Selling Your Product at a Lower Than Usual Price?
Special Order pricing: A practical guide to deciding whether to accept or reject an order at a below-normal price by determining the Minimum Price based on relevant costs, idle capacity, and opportunity cost—Digital Salla.
- What is a Special Order and why do companies consider it?
- The 3 critical conditions: Idle Capacity, Incremental Profit, and No Cannibalization.
- How to calculate the Minimum Acceptable Price.
- In-depth numerical case study: Special Order Analysis.
- The impact of Opportunity Cost when capacity is limited.
1) The Concept of Special Orders
A Special Order is a one-time customer request to buy a large volume of your product at a price below your standard list price. This often happens with export orders, bulk government tenders, or private labeling requests.
2) Condition #1: The Idle Capacity Test
Before you even look at the price, you must ask: “Do we have idle machines and labor?”
- If Yes: The order is a candidate for acceptance because it doesn’t hurt existing sales.
- If No: You must sacrifice a regular $30 customer to serve a $20 special customer. This is almost always a Bad Decision unless there’s a strategic long-term reason.
3) Condition #2: Identifying Relevant Costs
In a special order, Unavoidable Fixed Costs (like factory rent or depreciation) are Irrelevant.
| Cost Item | Status | Reasoning |
|---|---|---|
| Direct Materials | Relevant | Incremental (spent only if order is taken) |
| Direct Labor | Relevant | Incremental (extra wages/overtime) |
| Variable Overhead | Relevant | Extra electricity and supplies |
| Special Tooling | Relevant | If the order requires a special mold/design |
| General Factory Rent | Irrelevant | Sunk/Unavoidable (paid regardless) |
4) The Special Order Filter (Visual Logic)
Why accepting a price below “Total Cost” can actually increase your total profit?
Multi-level BOM Cost Roll-up - Excel Template
5) Case Study: Exporting 5,000 Units
Regular Price: $30 | Total Accounting Cost: $25 (includes $8 fixed overhead).
A foreign client offers to buy 5,000 units at $20 each.
| Item | Amount | Calculation |
|---|---|---|
| Incremental Revenue | $100,000 | (5,000 units x $20) |
| Incremental Costs | ($85,000) | (Variable $17 x 5,000) |
| Fixed Costs (Allocated) | $0 | Irrelevant (Stays the same) |
| Incremental Profit | +$15,000 | ACCEPT THE ORDER |
6) Special Orders with Limited Capacity
If your factory is already 100% full, the special order is no longer “Free.” You must include Opportunity Cost.
Minimum Price =
Incremental Costs of Special Order
+ (Profit Lost from Regular Sales / Special Units)
7) Factoring in Opportunity Cost
If accepting the special 5,000 units means you must cancel 2,000 units of regular sales at a $10 margin, your Opportunity Cost is $20,000.
- You must add this $20,000 to the cost of the special order.
- The minimum price per unit would jump by $4 ($20,000 / 5,000 units).
8) Operational Controls & Readiness Checklist
To ensure your Special Order decisions are sound:
Pricing Quality Gate Checklist
- Is the Idle Capacity verified by the Production Manager?
- Have all incremental costs (shipping, duties, special packaging) been included?
- Is there a risk of Price Cannibalization (regular customers finding out)?
- Does the order require a long-term commitment that might block future high-priced work?
- Is the Segment Margin still positive after the special pricing?
9) Common Errors and How to Prevent Them
- Rejecting based on “Total Cost”: Seeing $25 in the books and rejecting a $22 offer that actually adds profit.
- Ignoring Shipping & Duties: Forgetting that export special orders often have higher variable selling costs.
- The “Foot in the Door” Trap: Accepting a loss-making special order today hoping for a profitable one later (usually never happens).
- Forgetting Bottlenecks: Forgetting that even if machines are free, labor or raw materials might be limited.
10) Frequently Asked Questions
When should I accept a special order?
When you have idle capacity and the incremental revenue exceeds the incremental relevant costs (variable costs + direct fixed costs).
Why is fixed overhead irrelevant in this decision?
Because fixed overhead like rent is Unavoidable. You pay it whether you accept the special order or let your machines sit idle.
What is price cannibalization?
It is when existing customers who would have paid full price find out about the discount and demand the same lower price, hurting your overall revenue.
11) Conclusion
Deciding on a Special Order is a test of your Strategic Accounting skills. By moving away from “Average Costs” and focusing on Incremental Analysis, you gain the ability to turn idle resources into real profit. Always perform the Idle Capacity Test, identify every Relevant Cost, and never ignore the qualitative risks to your brand and pricing structure. This methodology ensures that every “Deal” you sign is a guaranteed boost to your entity’s bottom line.
Action Step Now (30 minutes)
- Ask your floor manager: “What is our current capacity utilization?”.
- If it’s below 80%, identify the Incremental Variable Cost for your best-seller.
- Calculate your “Absolute Minimum Price” for a special order. You are now ready for the next bulk inquiry.