Cost Based Pricing
for Procurement organizations and Manufacturing companies
Future Procurement
Robert Freeman Procurement Expert
Future Procurement
Cost Based Pricing for Procurement organizations and Manufacturing companies
1. What is price? 2. Why prices are different? 3. Three approaches to price setting 4. Cost Based Pricing principles 5. Getting it all together: Cost Based Pricing example 6. Pro’s and Con’s of Cost Based Pricing 7. Best way to use Cost Based Pricing concept
Future Procurement
Monetary equivalent of the product/service. Value of money per 1 unit of product or service. …
Future Procurement
Why prices are different?
- Different options (memory, colors… )
-Different added services(network or unlock)
-Delivery terms and conditions
-Different suppliers have different costs
-Profit expectations may vary - …
Why prices are different? Future Procurement
• Investigate the competitors
• Position yourself on the market
• Set the price according to market and your position
• Identify the benefits for the customers
• Quantify the benefits in money
• Set the price based on the value for the customer
• Study your costs and volumes
• Set the profit expectations
• Direct cost
+Indirect cost +Overheads
+Mark-up
=Price
Cost based Market pricing Value based
Future Procurement
0
20
40
60
80
100
Price
Mark-up
Cost
What is the mark-up?
What is the base for mark-up?
P.S. Mark-up is not the same thing as Margin or Profit
0
20
40
60
80
100
Price
Mark-up
Cost
Future Procurement
0
20
40
60
80
100
Price
Mark-up
Indirect Costs
Direct Costs
What is Direct?
What is Indirect?
P.S. Direct & Indirect costs are not always the same as Fixed & Variable
Future Procurement
0
20
40
60
80
100
Price
Mark-up
Financial costs
Depreciation
Overheads
Packaging
Energy
Labour
Material C
Material B
Material A
What are the materials involved?
What are the
processes involved?
P.S. use the accountant books to estimate the Indirect costs & Labour
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0
100Mark-up
Financial costs
Depreciation
Overheads
Packaging
Energy
Labour
Material C
Material B
Material A
Future Procurement
Costs
Materials
Direct Indirect
Labour
Direct Indirect
Other expenses
Direct Indirect
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Costs of coffee to go Materials
Direct Indirect
Labour
Direct Indirect
Other expenses
Direct Indirect
Don’t forget about maintenance costs, non-quality costs…
Future Procurement
Cost type Price Consumption Cost per piece
Water 1,91 Euro/1000l 0,1 l € 0,000191 Coffee beans 4,5 Euro/250 gr 8 gr € 0,14 Napkin 1 Euro/100pcs 1 pcs € 0,01 Paper cup 1 Euro/6pcs 1 pcs € 0,17 Sugar, energy € 0,10
Variable costs € 0,42
Cost type Yearly amount Yearly forecast, cups
of coffee Cost per piece
Labour 25 000
40 000
€ 0,63 Depreciation 2 000 € 0,05 Financial costs 300 € 0,0075 Rent 18 000 € 0,45 Overheads 5 000 € 0,13
Fixed costs 50 300 € 1,26
TOTAL costs € 1,68
Mark-up (10%) € 0,17
Total price € 1,85
Future Procurement
Cost type Price Consumption Cost per piece
Water 1,91 Euro/1000l 0,1 l € 0,000191 Coffee beans 4,5 Euro/250 gr 8 gr € 0,14 Napkin 1 Euro/100pcs 1 pcs € 0,01 Paper cup 1 Euro/6pcs 1 pcs € 0,17 Sugar, energy € 0,10
Variable costs € 0,42
Cost type Yearly amount Yearly forecast, cups
of coffee Cost per piece
Labour 25 000
40 000
€ 0,63 Depreciation 2 000 € 0,05 Financial costs 300 € 0,0075 Rent 18 000 € 0,45 Overheads 5 000 € 0,13
Fixed costs 50 300 € 1,26
TOTAL costs € 1,68
Mark-up (10%) € 0,17
Total price € 1,85
Cost type Price Consumption Cost per piece
Water 1,91 Euro/1000l 0,1 l € 0,000191 Coffee beans 4,5 Euro/250 gr 8 gr € 0,14 Napkin 1 Euro/100pcs 1 pcs € 0,01 Paper cup 1 Euro/6pcs 1 pcs € 0,17 Sugar, energy € 0,10
Variable costs € 0,42
Cost type Yearly amount Yearly forecast, cups
of coffee Cost per piece
Labour 25 000
55 000
€ 0,45 Depreciation 2 000 € 0,04 Financial costs 300 € 0,0055 Rent 18 000 € 0,33 Overheads 5 000 € 0,09
Fixed costs 50 300 € 0,91
TOTAL costs € 1,34
Mark-up (10%) € 0,13
Total price € 1,47 ECONOMY OF SCALE
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ECONOMY OF SCALE
Cost type Price Consumption Cost per piece
Water 1,91 Euro/1000l 0,1 l € 0,000191 Coffee beans 4,5 Euro/250 gr 8 gr € 0,14 Napkin 1 Euro/100pcs 1 pcs € 0,01 Paper cup 1 Euro/6pcs 1 pcs € 0,17 Sugar, energy € 0,10
Variable costs € 0,42
Cost type Yearly amount Yearly forecast, cups
of coffee Cost per piece
Labour 25 000
40 000
€ 0,63 Depreciation 2 000 € 0,05 Financial costs 300 € 0,0075 Rent 18 000 € 0,45 Overheads 5 000 € 0,13
Fixed costs 50 300 € 1,26
TOTAL costs € 1,68
Mark-up (10%) € 0,17
Total price € 1,85
Cost type Price Consumption Cost per piece
Water 1,91 Euro/1000l 0,1 l € 0,000191 Coffee beans 4,5 Euro/250 gr 8 gr € 0,14 Napkin 1 Euro/100pcs 1 pcs € 0,01 Paper cup 1 Euro/6pcs 1 pcs € 0,17 Sugar, energy € 0,10
Variable costs € 0,42
Cost type Yearly amount Yearly forecast, cups
of coffee Cost per piece
Labour 25 000
30 000
€ 0,83 Depreciation 2 000 € 0,07 Financial costs 300 € 0,0100 Rent 18 000 € 0,60 Overheads 5 000 € 0,17
Fixed costs 50 300 € 1,68
TOTAL costs € 2,10
Mark-up (10%) € 0,21
Total price € 2,31
Future Procurement
- €
0,5€
1,0€
1,5€
2,0€
Mark-up (10%)
Overheads
Rent
Financial costs
Depreciation
Labour
Sugar, energy
Paper cup
Napkin
Coffee beans
Water
Cost type Price Consumption Cost per piece
Water 1,91 Euro/1000l 0,1 l € 0,000191
Coffee beans 4,5 Euro/250 gr 8 gr € 0,14
Napkin 1 Euro/100pcs 1 pcs € 0,01
Paper cup 1 Euro/6pcs 1 pcs € 0,17
Sugar, energy € 0,10
Variable costs € 0,42 Cost type Yearly amount
Yearly forecast, cups of coffee
Cost per piece
Labour 25 000
40 000
€ 0,63
Depreciation 2 000 € 0,05
Financial costs 300 € 0,0075
Rent 18 000 € 0,45
Overheads 5 000 € 0,13
Fixed costs 50 300 € 1,26 TOTAL costs € 1,68 Mark-up (10%) € 0,17
Total price € 1,85
Future Procurement
Mark-up
Financial costs
Depreciation
Overheads
Packaging
Energy
Labour
Material C
Material B
Material A
+ Helps you to understand the price from the supplier perspective. + Price negotiations are more effective and fact based + You can make the modeling based on Cost Break Down, when planning the price reduction activities + Good base for building long term partnership on win-win basis
Pro’s
Future Procurement
-Requires opened and trustful relations -Requires the conscious and precise control over costs (especially indirect)
- Most likely cost based price will differ from the market price or value based price. Can be positive or negative
- Volumes are very important
Con’s
Mark-up
Financial costs
Depreciation
Overheads
Packaging
Energy
Labour
Material C
Material B
Material A
Future Procurement
A good Cost Break Down should:
• Be simple but representative
• Be splitted into fixed and variable costs
• Take in consideration consumptions and prices
• Take in consideration ex-rates (if any)
• Include the volumes/forecasts
- €
0,5€
1,0€
1,5€
2,0€
Mark-up (10%)
Overheads
Rent
Financial costs
Depreciation
Labour
Sugar, energy
Paper cup
Napkin
Coffee beans
Water
Future Procurement
proven practices for procurement professionals
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