Dickeson--The Age-old Problems Of Cost and Price
Setting price is where we lack statistical tools. Case in point: Printer-publisher with a specialty is doing well. Now wants to sell idle time available on his press. How to price it? George Accountant says use a manufacturing or full absorption cost and mark it up. Ugh.
"Hey, George, price is an external measure of the customer's perception of value-added, limited by competition. What is the customer's value perception? How do we find that out? What would competitors charge? How do we discover that?"
Now, standing with tenuous assurance at best on that direct cost base, how high dare we reach for a price? What is the price elasticity of the customer's value perception? Upward? Downward? Where will our competitor come down on price? Will we get a 'second look?' At least we're asking the right questions, aren't we? That's half the solution. We're not simply marking up some figment of manufacturing or full absorption rate! Oh, for some magic box! Dear Peter Drucker, where are you now when we need you?
Ah yes, Drucker, we read you in Forbes, August 24, 1998, on page 46: Our accounting/cost accounting computerized systems have had "…near-zero impact on the management of business itself."
We must redefine the information we need. We need economic chain accounting, you say. We must approach our printing business as a creator of value for a customer and not as simply a creator of internal costs. Therefore in setting our contribution reach we must concentrate on factors outside the business, not on cost events inside the business.
Okay, let's "just do it", as Nike says. Let us cease and desist with all our cost accountancy as a measure of PRICE. Let's re-engineer the information that guides our basic business decisions. Starting as of NOW—if not sooner.