Lecture 10 Flashcards
Value Equation
Driving force behind the today’s competition is represented by the value equation.
Strategic Cost Management Techniques
Price Analysis
Costs Analysis
Collaborative Cost Management
Price Analysis
The process of comparing supplier prices against external benchmarks.
Price Analysis Economic Conditions
Market Structure
Pricing strategy of the seller
Market-driven pricing
Using PPI to manage pricing
Market Structure
Monopoly
Oligopoly
Perfect Competition
Monopoly
Single Supplier Market
Unique product with no substitues
Oligopoly
A few large suppliers.
Pricing strategies of one supplier influence others in the industry
Perfect Competition
Many small suppliers
Price is solely a function of supply and demand
Pricing Strategy of the seller
Depending upon the market condition, seller’s pricing strategy may have little or nothing to do with its cost.
Seller’s price can be driven by competition or by the buyer’s need for the product.
Seller’s price can be market-driven or cost-based.
Market-Driven Pricing Models
Price volume model Penetration pricing Market skimming model Revenue pricing model Promotional pricing model Competition pricing model Cash discounts
Price Volume Model
Idea is to lower the price to induce the buyer to purchase in larger quantities
Penetration Pricing
Initially offers low price to gain market share, then increases price
Market Skimming Price
Charge a high price because you have a substantial competitive advantage
Revenue Pricing Model
Used in market downturns
Seller is concerned with generating sufficient revenue to cover out-of-pocket costs
Promotional Pricing Model
Prices set to enhance overall product line profitability, not individual products within the line
Competition Pricing Model
Focuses on reacting to actual or anticipated competitor pricing
Cash Discounts
Incentives to buyer who pay invoices promptly
PPI
Tracks material price movements on a quarter-to-quarter basis
Cost-Based Pricing Models
Cost markup pricing model
Margin pricing model
Rate-of-return pricing model
Cost Markup Pricing Model
SP = Cost + (MU * Cost)
Margin Pricing Model
SP = Cost / (1 - Rate)
Rate-of-Return Pricing Model
SP = Cost + (Rate * (Investment / Unit))
Break-Even Analysis
Point at which revenue equals cost.
Product Specification
Commoditize the product specifications to reduce the cost
Reverse Price Analysis
Estimate suppliers costs
Collaborative Cost Management
Target Pricing
Cost Savings Sharing
Target Pricing
used in new product development
Gap in cost become cost reduction goal
Breakdown the product level target cost all the way to the component level target costs
Cost Savings Sharing
Sharing of continuous improvement benefits
Financial incentives to supplier to pursue cost reduction
