Metrics & Analytics
MCM 723 Metrics and Analytics December 2, 2012 Think 4
A. Describe cost-based pricing and value-based pricing, noting the differences in approach and results. Give examples of products or services priced each way, and justify your reasoning. How could cost-based pricing lead to a price lower than customers would have paid and how does this impact the profit of a business?
The Cost- based pricing concept is regulating the cost of production or fulfillment as the basis for pricing goods and or services. Using this method, the selling price of a product will be the cost to produce it, including both direct and indirect costs, plus an additional amount to generate a profit for the seller. The strategy to establishing this type of pricing has a financial objective of setting a high price to make high profits initially. Then following a recovery period of extensive research and development cost to maximize profits before any factors, such as competitors begin to enter the market. Forming a low price on products to make quick sales is a way business (large or small) strategize to increase cash flow. The formula used to map out this type of pricing is : Break-Even Unit Volume= (Fixed costs/ Unit Contribution Margin). Unit Contribution Margin= Selling Price per unit-Variable cost per unit. The only disadvantage with cost based pricing is that if the cost increase, the price of the product must increase as well. Cost based pricing is sub-classified into four other types of pricing 1.) Cost plus pricing- a fixed percentage of profit is added to the cost. The fixed percentage of profits could be the manufacturer 's profit, wholesalers profit and retailer 's profit. 2.) Full Cost Pricing- Total cost is computed by adding the variable and fixed cost in the product manufacturing, administration and selling. On the total cost, the required margin of
profit is added. 3.) Target Profit Pricing- (also known as rate of return pricing). This concept is similar to full cost
A. Describe cost-based pricing and value-based pricing, noting the differences in approach and results. Give examples of products or services priced each way, and justify your reasoning. How could cost-based pricing lead to a price lower than customers would have paid and how does this impact the profit of a business?
The Cost- based pricing concept is regulating the cost of production or fulfillment as the basis for pricing goods and or services. Using this method, the selling price of a product will be the cost to produce it, including both direct and indirect costs, plus an additional amount to generate a profit for the seller. The strategy to establishing this type of pricing has a financial objective of setting a high price to make high profits initially. Then following a recovery period of extensive research and development cost to maximize profits before any factors, such as competitors begin to enter the market. Forming a low price on products to make quick sales is a way business (large or small) strategize to increase cash flow. The formula used to map out this type of pricing is : Break-Even Unit Volume= (Fixed costs/ Unit Contribution Margin). Unit Contribution Margin= Selling Price per unit-Variable cost per unit. The only disadvantage with cost based pricing is that if the cost increase, the price of the product must increase as well. Cost based pricing is sub-classified into four other types of pricing 1.) Cost plus pricing- a fixed percentage of profit is added to the cost. The fixed percentage of profits could be the manufacturer 's profit, wholesalers profit and retailer 's profit. 2.) Full Cost Pricing- Total cost is computed by adding the variable and fixed cost in the product manufacturing, administration and selling. On the total cost, the required margin of
profit is added. 3.) Target Profit Pricing- (also known as rate of return pricing). This concept is similar to full cost
References: Best, R. (2009). Market-Based Management. Columbus, OH: Pearson. ISBN: 9780132336536. Case: Knight, R. & McNaughton, R. (2010). Catfish Creek Canoe Company. University of Western Ontario: Ivey Publishing Company. Hughes D. Value-based pricing: incentive for innovation or zero net benefit?. Pharmacoeconomics [serial online]. September 2011;29(9):731-735. Available from: MEDLINE with Full Text, Ipswich, MA. Accessed December 2, 2012. Stedman C. Value-Based Pricing. Computerworld [serial online]. March 13, 2000;34(11): 58. Available from: Computers & Applied Sciences Complete, Ipswich, MA. Accessed December 2, 2012. Pederson C. Cost-based pricing and the underperforming physician group. Healthcare Financial Management: Journal Of The Healthcare Financial Management Association [serial online]. October 2005;59(10):62. Available from: MEDLINE with Full Text, Ipswich, MA. Accessed December 2, 2012.