Strategic and Innovative Pricing by Cöster Mathias; Iveroth Einar; Olve Nils-Göran

Author:Cöster, Mathias; Iveroth, Einar; Olve, Nils-Göran
Language: eng
Format: epub
Publisher: Taylor & Francis Group
Published: 2020-08-15T00:00:00+00:00

How to Measure Costs: Assessing the Use (Consumption) of Resources

It is practical, but often misleading, to use conventional accounting systems to determine costs in the situations we have discussed this far. If a unit is entirely dedicated to the offering that is to be priced, it may seem easy to decide which costs have to be covered. But often a major point of innovative pricing is “versioning”, where a firm may enter into different relations with different customers who should pay differently, depending on the “bespoke” treatment given to them. To identify the resources needed for this, the costs associated with this and what share of that cost customers should rightly pay is not something a standardised reporting system can handle. Mark-ups like in the Economist quote earlier in this chapter are no fix for this, especially not if a seller wants to price its offering according to “what the market will bear”. But also, when a company is charging its customers based on value, cost estimates are necessary in order to find a rational and effective way of working and to predict financial profitability (as indicated in Figure 5.1).

In classical cost accounting, concepts such as fixed and variable costs (linked to produced volume) and “learning curves” reduce cost over time as cumulative volume increases. This usually builds on assumptions of homogeneous products which can be counted. In the 1990s, “activity-based costing” taught firms that costs may be driven by order or batch volume, rather than product volume. Customers requiring short delivery time may require increased inventories, and high-precision quality may necessitate expensive tools and processes for some demanding customers (but not all). These are also “cost drivers” to take into consideration. In a similar way, we believe that changing the value proposition and the price model will result in a need to reconsider the cost structure to see how it will change due to this.

We will here first discuss cost as a basis for price and relevant cost analysis. But, as we mentioned earlier, costs are themselves a consequence of how the price model is defined. Hence, we also discuss “inbound” and “internal” price models, and how they become costs for the buyer. All business model components that involve relations with suppliers and business partners will influence cost calculations.

In a recent article we identified how changes in markets motivate new price models. Two such changes are: 1) direct costs have come to constitute a smaller, and sometimes negligible, part of all costs; and 2) business relations are often long-lasting and involve dedicated investments in “asset specificity” (Cöster et al., 2019, pp. 542–543):

Many activities require high “up-front” costs and investments (Arthur, 1996), which then must be recuperated through charging customers for a range of goods and services which were enabled by the “up-front” outlays. As a result, accounting cost information often provides unreliable guidance in arriving at “fair” prices. Rather, both popular and academic literature on marketing suggests that customers’ valuation of their benefits from their purchases should be the yardstick (McNair-Connolly et al.

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