Posts Tagged ‘fixed costs’

Subscription Charging Plans for Electric Cars?

May 27th, 2011 Comments off

Th!nk City electric cars at a test drive event, Washington DCOn Monday, The Wall Street Journal ran a special section about transportation in the future.  The thing that caught my eye, though, wasn’t the predictions about futuristic high-speed rail networks or the fact that new fuels would replace oil-based products.  What I found interesting was that as charging networks are built-out across the country for electric cars there is a high-likelihood that a subscription-based model will take hold.  Similar to mobile phones or health-clubs, the price someone pays will be the same each month regardless of how much they use the service. In the context of what we’ve been talking about with regard to variable and fixed costs this is an important idea.  To be sure, it is a huge investment to install the equipment at very high fixed cost before many people need the equipment, but companies that do so are hoping for a payoff in the future.  Signing up customers at fixed prices (via a subscription model) will allow them to lock-in revenues rather than be subject to changing volumes over time.  I guess we’ll have to wait and see if the subscription model is really the one that comes to be, but it is interesting that it is the leading candidate right now.

Tomorrow’s Transport (A Special Report) — Charge It!: If electric cars take off,they will need a network of charging stations; but how will people pay? Mike Ramsey. Wall Street Journal. (Eastern edition). New York, N.Y.: May 23, 2011. pg. R.7

Groupon’s Success Disaster

September 19th, 2010 Comments off

There are some interesting strategic lessons in this blog post about a coffee shop’s brush with bankruptcy following a “successful” Groupon promotional campaign.  A couple that I’ll point out:

  1. Fixed costs are very real and need to be taken into account. High “revenues” are not a measure of success when the costs are even higher than the money coming in.
  2. Being a cost leader (or viewed as one — which is essentially the same thing) can be dangerous because all of the people that want a deal will buy — but only as long as they get a deal.
  3. In a related area, customers that search for “deals” will move on to the next deal when it comes along rather than becoming a long-term customers.

Read more at this link: Groupon’s Success Disaster | Redfin Corporate Blog.

Billable Hour Under Attack

August 25th, 2009 Comments off

This article focuses on Law Firms, but I imagine that Accounting Firms will be feeling the same pressure to change their pricing model from “billable hours” to other ways of charging for their services.  That doesn’t mean that there still can’t be a profit margin factored in, of course, but it will mean that people that want to charge so much for certain types of services will need to really understand what their costs are so that they aren’t surprised at the end of the month/quarter/year to find out that they didn’t charge enough.  For example, it will be imperative that things like fixed costs and variable costs are well understood.

With the recession crimping legal budgets, some big companies are fighting back against law firms’ longstanding practice of billing them by the hour.

The companies are ditching the hourly structure — which critics complain offers law firms an incentive to rack up bigger bills — in favor of flat-fee contracts. One survey found an increase of more than 50% this year in corporate spending on alternatives to the traditional hourly-fee model.

‘Billable Hour’ Under Attack — In Recession, Companies Push Law Firms for Flat-Fee Contracts. Nathan Koppel, Ashby Jones. Wall Street Journal. (Eastern edition). New York, N.Y.: Aug 24, 2009. pg. A.1

An earlier item from the Journal of Accountancy referred to the practice in CPA Firms as “Value Pricing” in a similar context:

Midsize Law Firms Gain Clients at Expense of Giants

July 6th, 2009 Comments off

This post will be the first of three today based on articles all found on page B1 of The Wall Street Journal.  This one has to do with the adaptability of smaller organizations in times of economic turmoil and it specifically mentions having lower fixed costs as a key advantage.  The article focuses on law firms, but it would be very easy to extrapolate the information here to other industries including accounting firms.  It’s an interesting predictament the smaller firms find themselves in because lowering their prices now to attract business may make it awfully difficult to raise them later and they risk turning their business model into that of “commodity seller” where the buyers will always seek out the lowest price.

Midsize Law Firms Pick Up Clients As Companies Turn From Pricey Giants. Chris Herring. Wall Street Journal. (Eastern edition). New York, N.Y.: Jul 6, 2009. pg. B.1

Fixed Costs Chafe at Steel Mills

June 12th, 2009 Comments off

Here is a real world example where the impact of having a structure of very high fixed costs, such as in steel production, can be very difficult to manage in tough economic times.  Normally when demand falls, prices also fall (recall the supply-demand curves from your Economics courses).  The problem for steel mills is that producing fewer units of steel causes them to have to spread their very high fixed costs over fewer units so they feel the need to actually raise prices so as not to lose money (or not to lose as much money at least).  Raising prices causes demand to fall further still and that could lead to some companies being eliminated from the marketplace which could cause prices to stabilize as the remaining producers are able to operate nearer to full capacity.

I think this is a great example of the impacts of fixed vs. variable costs structures that we have discussed in class.

“Unlike mill increases announced in recent years, this is obviously not driven by increasing global demand, but rather by fixed costs being proportioned across significantly lower demand,” the company said in a letter to customers.

Corporate News: Fixed Costs Chafe at Steel Mills — Capital-Intensive Producers Are Raising Prices Despite Weak Demand. Robert Guy Matthews. Wall Street Journal. (Eastern edition). New York, N.Y.: Jun 10, 2009. pg. B.1

“Value Pricing” in CPA Firms

June 2nd, 2009 Comments off

We talk extensively about pricing in HDFRI Chapter 12 and one of the key concepts in that chapter is the recent adoption by many companies of a practice called “target costing.”  In target costing/pricing, a company estimates the value perceived by a customer given the nature and features of a proposed product and then tries to determine what price a customer would pay for that product.  The company then works “backwards” from that price to the “target cost” necessary for the company to sell the product for that price while still earning their desired rate of return.  This is the opposite of cost-based pricing where the company looks at their costs and then determines the price based largely on that.

The Journal of Accountancy this month explores a similar philosophy change in some CPA Firms (a service industry) where clients are no longer billed according to the number of billable hours worked by their accountants, but instead by the specific service being performed.  There is also a sidebar about pricing at Ben & Jerry’s that is a good example of the thought process that can come into play when determining prices.

Pricing on Purpose: How to Implement Value Pricing in Your Firm. By Ronald J. Baker.  The Journal of Accountancy, June 2009.

A Lesson in Value Pricing Ice Cream: From an Accountant. By Ronald J. Baker.  The Journal of Accountancy, June 2009.