Presentation from the free course "Cost Based Pricing" which you can find on Udemy

1. Cost Based Pricing
for Procurement organizations and Manufacturing companies
Future Procurement
Robert Freeman
Procurement Expert
Future Procurement

2. 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

3. 1. What is price?
Future Procurement

4. Monetary equivalent of the product/service.
Value of money per 1 unit of product or
service.
…
Future Procurement

5. Price
is
an alternative.
Future Procurement

6. 2. Why prices are different?
Future Procurement

7. Why prices are different?
Future Procurement

8. 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

9. 3. Three approaches to price setting
Future Procurement

10. Future Procurement

11. Future Procurement

12. Future Procurement

13. Future Procurement

14. Future Procurement

15. Cost based Market pricing Value based
Future Procurement

16. • 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

17. 4. Cost Based Pricing principles
Future Procurement

18. 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

19. 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

20. 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
Future Procurement

21. 0
100
Mark-up
Financial costs
Depreciation
Overheads
Packaging
Energy
Labour
Material C
Material B
Material A
Future Procurement

22. 5. Getting it all together:
Cost Based Pricing example
Future Procurement

23. Costs
Materials
Direct Indirect
Labour
Direct Indirect
Other expenses
Direct Indirect
Future Procurement

24. 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

25. Fixed costsVariable costs
Semivariable costs
Future Procurement

26. 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

27. 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
Future Procurement

28. 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

29. - €
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

30. 6. Pro’s and Cons of Cost Based Pricing
Future Procurement

31. 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

32. -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

33. 7. Best way to use Cost Based Pricing concept
Future Procurement

34. 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

35. proven practices for procurement professionals
Future Procurement
www.FutureProcurement.net Join us
Future Procurement