Cost-Benefit Analysis in Industrial Pricing

To formulate an appropriate industrial pricing strategy it is very essential to have an  analysis of the costs and benefits of the industrial product from the customer’s  point of view.

The benefits can be grouped into soft and hard benefits. Soft benefits includes  those benefits which are very difficult to assess, such as customer training,  warranty period, customer services, company reputation etc.  Hard benefits are the physical attributes of the products such as production rate  of machine, rejection rate of component and price/performance ratio.

Cost-Benefit Analysis in Industrial Pricing

The costs for an industrial customer mean price plus other expenses that are  incurred in purchasing and using the product. For example, the cost of a new oil  refinery machine purchased by oil mill includes price, freight, installation,  energy usage, repair and maintenance. The cost of production stoppage due to  failure of machine may also be included while calculating the machine cost  though it is difficult to estimate such cost accurately. The life cycle costing  concept can be used by the industrial buyer at the time of purchasing the capital  items and estimate the total cost of the product over its life span. Life cycle  costing takes into consideration the price, freight, transit insurance,  maintenance’s, energy, material and  labor  costs over the useful life of the  product.

The industrial marketer should evaluate the possible cost/benefit trade-off  decisions made by the industrial buyer. If the quantum of discount offered by  industrial marketer as an incentive for purchase of large stock can be considered  by the industrial buyer if the quantum of discount is more then the cost of  carrying the inventory. The understanding of cost-benefit analysis in  industrial  pricing will enable  the marketer to set an appropriate price.

Cost Analysis  in Industrial Pricing

Pricing strategy or decision of a company must consider the  costs involved. Generally the total cost consists of the variable cost and fixed  costs for a given level of out put. Some of the cost elements vary over a period  of time; other cost elements fluctuate with volume. The cost data are relevant to  the pricing decisions. The industrial marketer must identify and classify the cost  for making profitable pricing decisions. The classification of costs and their  description is given in the following table for the better understanding of the  cost concept.

Classification of Costs/Types of Costs

  1. Fixed costs: Costs that do not vary with production or sales.  Examples are rent, interest charges, and  managerial salaries. Fixed costs or overheads are  incurred irrespective of production levels or sales  volume.
  2. Variable costs: Costs that vary in direct proportion to the levels of  production. Examples are raw materials and direct  labour costs. They are called variable because the  total variable cost varies with the number of units  produced.
  3. Total costs: Sum of the fixed and variable costs for any given  level of production are called fixed costs.
  4. Semi variable costs: Costs that vary with changes in output but not in  direct proportion to quantities produced.  Examples are equipment repair and  maintenance  costs. Semi variable costs have components of  both fixed and variable costs.
  5. Direct costs: Fixed or variable costs that are incurred directly  for a specific product or sales territory. Examples  are selling expenses, freight and raw material.
  6. Indirect costs: Fixed or variable costs that can be traced  indirectly to sales territory or a product. Examples  are production overhead and quality control that  are indirectly assigned to a product.
  7. Allocated costs: Costs that support a number of activities but  cannot be objectively assigned to a specific  product or a market. Theses costs are usually  allocated across business groups or divisions by  some arbitrary criterion. Examples are  administrative overhead and corporate advertising.

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