Personal sharing on the concept of Price

1. What’s the price?
Tiago Lopes, Industrial Engineer/Executive MBA, January 2015
A personal view into tools and
methodologies

2. Warning! Cost ≠ Price ≠ Value
2
Price
Value
Cost
• Commercial arrangement
• Premiums from
innovation, availability
• Target RFQ
• Strategy
• Form, Fit and Function
• Quality, Delivery, Convenience,
Performance, etc.
• Extrinsic and emergent
• Materials, Labor,
Manufacturing, etc.
• Calculated reference for
negotiations, continuous
improvement
• Internal and actionable
In a previous presentation - The art of costing - I’ve already mentioned that we must
understand the fundamental differences between Price, Cost and Value.
These are complementary concepts/abstractions but not the same, as they serve a
different functions in a business environment

3. Price strategy
• Not discussing «basic survival conditions», price is a
powerful tool to gain market advantage
• According to “The Economic Times” the definition is:
Price is the (market) value that is put to a product or service and is the
result of a complex set of calculations, research and understanding and risk
taking ability. A pricing strategy takes into account segments, ability to pay,
market conditions, competitor actions, trade margins and input costs,
amongst others. It is targeted at the defined customers and against
competitors.
There are 4 major strategies which might be combined to a certain weight
of importance and according to a specific target - Premium pricing;
Penetration pricing; Economy pricing; Skimming strategy

4. Why is Price so linked with strategy?
• A company that has a price strategy is able to use different
weapons at different times, growing and reinforcing its
strengths, while maintaining confidence on their
stakeholders
• The concept of “Price” is simplified in the following formula:
* Note: to avoid lengthy descriptions please consider that every time I refer a product
a service could also be consider
Revenue = Quantity x (Price – Cost)
• In the following slides I’ll show you why
“Price” is subordinated but also
independent of the product* cost, as the
price can be manage throughout the
lifecycle of the product to achieve
specific objectives

5. Revenue throughout the product lifecycle
No income
only cost
Income starts but still
cost much higher
Income in equilibrium
with cost
Income much higher
than costs
No more costs or
income
Income is declining
but still positive
balance to cost
From loss to breakeven, hopefully arriving at a return on the investments, all phases can
have a different price tactic, part of the underlying price product lifecycle strategy.
Also note that different industries and markets would react differently and that this is a
conceptual approach

6. The concept of variable price throughout
the Product lifecycle – some ideas to grasp
the concept
If it is an innovative
product that the
market is aware and
eager to have, we can
consider a premium
price for the product
at the start of
commercialization
At the development
phase of a project
there is still no
revenue as the
product is not sold
and we should plan
how to recover this
investment…can we
sell the concept in
advance?
Note: most
companies can have
great economies if
they are able to build
upon the knowledge
base they have
gathered along the
years
At this stage a product should
have recovered all the
investment and with some
interesting margin. It is possible
to conceive radical discounts or
other offers to continue
stretching the revenue stream
of the product
Depending on the market
agreement, it is possible
from giving the product
away for free to again
premium price. It is even
possible to re-sell the rights
to produce or intellectual
property and have a new
business model
Being the “king of the hill” is not easy
and some alliances might be required
to get to the top and to continue
there. This means different prices for
different sectors, partners, etc.
Note that it is theoretically possible that the costs to
produce the product are the same throughout the
lifecycle – not probable though, due to inflation,
variation of material costs, volumes variation, etc.

7. Making it worthwhile!
As a quick summary, we could have the following:
Revenue = Quantity x (Price – Cost)
and
Profit = Sum of Revenues - Investment
With different prices, quantities and even costs
throughout the lifecycle of the product, we can have a
profit, if the sum of revenues is bigger than the
investment made – at a certain required level for the type
of industry – despite losses during the product lifecycle.
Note that some other economical concepts would be required such as net present
value and discounted cash flow to further explain the concept but it is not the aim of
this presentation – see http://en.wikipedia.org/wiki/Discounted_cash_flow

8. Conclusion
• Price is a concept and a strategic tool
• It is market and industry dependent
• It can vary to attain specific purposes
• It must be balanced by cost but it can be
independent of it if we consider the total
product lifecycle

9. End note
Dear readers,
My goal is to share a fresh and different view on a
probably much discussed theme…
I will only know if I achieved my purpose if you are able
to provide me feedback.
Thanks in advance!
I’ll try to publish the last of this trilogy about “Value” in
the next weeks to follow, until then take care…

10. Who am I?
• I’m an Industrial Engineer and exec. MBA
• Experienced in
– Management: Plant Management, Business management,
Project Management, VA/VE and other special projects
– Operations: Supply chain, Industrial footpath & Green field
operations, Lean process installation & Ergonomics, Lean 6
Sigma continuous improvement
– Finance: P&L, Business plans, Cost calculation
– International footpath,
– Passionate for sci-fi and strategy