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Cost structures, Pricing & Tracking - Coggle Diagram
Cost structures, Pricing & Tracking
Target Costing
Key idea
Instead of starting with the cost of production and adding a desired profit margin => analyze the market and determine the price that customers are willing to pay.
Once the target price is established => Set a cost target by subtracting the desired profit margin from the target price.
Goal of target costing is to ensure that the cost of producing the product is within the set cost target
By working backwards from the target price, companies can identify areas where costs need to be reduced in order to achieve profitability while maintaining a competitive price in the market.
Typical gross margin
Retailers
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Differentiation: Products with unique features or qualities can command a higher markup compared to generic or easily substitutable products.
Retailers cost: Various costs associated with running a retail business can impact the gross margin. Factors such as seasonality, product lifecycle, returns, and the sales effort required can affect the overall costs and, consequently, the margin.
Price point: Luxury goods or specialty items often have a higher selling price but may have a lower markup percentage compared to lower-priced, mass-produced items.
Manufacturers
Volume: Higher sales volume usually leads to lower margins for manufacturers => As volume increases, manufacturers need to reduce prices to remain competitive, which impacts the overall margin.
Price point: Higher-priced products generally have lower margins, while lower-priced products may have higher margins.
Differentiation: Manufacturers who produce unique or highly differentiated products => potentially higher margins
Manufacturer's SG&A and R&D costs: Companies with high SG&A or R&D expenses may need higher markups to cover those costs and still achieve their target profit margin.
How to price
The 4Cs of Pricing
Competition: Include factors like direct competitors, substitute products, and the overall competitive landscape of the market.
Customer WTP
The maximum price a customer is willing to pay, determined by their perceived value of your offering, their budget constraints, and prices of alternatives
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Costs: These are the various expenses a business incurs in producing, distributing, and selling its products or services: manufacturing costs, materials, labor, overhead expenses, and distribution costs
Customer value: benefit customers perceive in product or service => It's about features, but the experience and overall problem-solving capability it offers
Price ceiling
The highest price that customers are willing to pay for a product or service, considering the customer value and competition.
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Price floor
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Businesses generally cannot afford to sell below the price floor in the long term without losing money.
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