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Posts Tagged ‘variable 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

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:

Airline-Sector Woes Slam India’s Highflier

July 4th, 2009 Comments off

Another airline story from Asia, this time about Jet Airways from India.  Until a couple years ago, Jet seemed unstoppable.  They modernized air travel in India and enjoyed market share of nearly 50% in 2003, but it has since fallen to less than half that.  Uncontrolled costs and external factors have taken their toll and this article sums up a lot of things we have talked about in class including cost control, fixed vs. variable costs, quality/cost/time issues, competition, compensation and staffing issues, etc.

Airline Sector’s Woes Slam a Highflier. Daniel Michaels. Wall Street Journal. (Eastern edition). New York, N.Y.: Jul 2, 2009. pg. A.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.