Product Economics and Profitability
In the new product development process the product proposed has already reached the pricing strategy.With the engagement of beta stage the product is at the verge of market pressure to justify the analytical anatomy of the product that will meet the economics of the customers.And it is a mirror effect to evaluate the economics of the product and its profitability for its future growth as well, to develop a feasible financial regime for the economics of the customers.
To juxtapose all the sides of the life cycle of the product development process, the paper will evaluate this stage from the standpoint of all the involved overheads.
The above mentioned approach includes the strategy of the organization, resources of the new product, the user group and the financial feasibility (Economy-point. org, 2006). The economics of product is broadly divided into two analytical approaches. Quantitative and qualitative analysis are the two major divisions that control the finance and the value of the successful new products.
It mainly operates in the micro economics environment. To gain insight in the price-profitability factors of the proposed product, the project will primarily consider the quantitative analysis, which will naturally be proving the worth of the quantitative valuation in response to the strategy and value driven valuation of the qualitative approach. In the new product development life cycle; there are different basic patterns of cash flows. The most functional cash inflow is the revenue of the organization, and the cash outflow is the cost of the production.
At ones, the importance of the cash flows can be identify by its thumb rule that the economically successful products generate profitability for which it generate more cumulative inflows than cumulative outflow. The scaling of magnitude of the balance between the cash flows finally projects the net present value (NPV) of the entire product development process, which gives several realistic outcomes. It produces the present fiscal valuation of all the possible cash flows of the future.
Thus, it evaluates the alternatives of the economics and the structure and discipline for the development of the process. Source: Product Design and Development On the other hand, qualitative analysis captures only the scalable factors. This often has variation in its degree of implication in the process, which are possible to assess in the quantitative analysis. It is much of objective by nature, rather subjective. It is more focused on the impacts of the changing and competitive factors.
This ability has been observed in the quantitative analysis though, but it exists at an extremely uncertain magnitude (Ulrich and Eppinger, 2004). On the forte of microeconomics, another economic approach to the product; is from the Neoclassical Theories of Production, provided by the New School. The key concept that is taking care of the organizational strategy pertaining to the overhead factors is the production function of the new school. It is the juxtaposition of all the factors in a total production development process.
In the year 1894, Philip Wicksteed proposed put into formula where y defines the output on calculating the multiple function of the production inputs. Y= f(x1, x2…xm) This theory shares the concept of Ragnar Frisch’s “single-ware” production technology of 1965. Theory eliminates the joint production venture. This pattern of product economy can assess the pricing and profitability factor of the product proposed. It can consider the x amounts of the overheads involved in the process.
The cost of raw material, auxiliary part production, assembling process, production automations, marketing, promoting, labelling, packaging and the entire cost of the logistic and the cost of the employees cost to company too who finally make the deal with the end user to yield the profit after meeting the said costs (The Production Function, 2009). To calculate the economics at which the product can be offered to the end users can now be worked upon by calculating the overall overhead cost of production, and then subtracting the valuation of all the possible cumulative cash flows of the future.
This can lead to a feasible Maximum Retail Price (MRP) of the product. But the gap or the balance of the MRP and the production cost that has been generated for considering the cumulative cash inflow will help the organization to decide on the profit margin of the product. But, unlike the costing of the product can be done; depending on the theory of microeconomics, the valuation of the gap or the profitability margin demands the market and its customer and their values too. This is mainly evaluated using the macroeconomics theory.
For instance, in general the average price of data card in the US is $50. 00. Now after knowing the production cost, if Virgin Mobile wants to fix the margin to justify the finance of the product economics, it needs to consider both the internal and external factors relating to the production. As the name suggests macro, it evaluates the gross concept of the product and its position in the market, as the organization needs to consider the existing price of the same product by it competitors in the market (MyRatePlan. com, 2009).
Since the organization strategy includes the revival of the revenue loss due to the merger and acquisition and the loss of confidence among the stakeholders, it advised that the organization should not propose any aggressive pricing. When the concept of the new product of the organization is not new for the market then it should create a niche for itself; primarily by gaining the fallen shares and the shareholders confidence. Further it has the alternative plan too, which a gradual extension of the present proposed product, by entering into the strategic partnership with the IT companies.
Dealing with these parameters the key factor that makes it way to conclude is, will it feasible for the customers to buy it. But, as the larger segment of the customers are retained, it will give certain technical facilities, which can be the facility of retaining the same contact number a customer is having. This is typically useful for the high value network client whose contact number is distributed among a wide circle. Thus, the customers are paying only for the device, not the connection. Moreover, there will not be any recurring expenditure of maintaining an extra connection.
To boost the sales, the organization can offer the customers of the strategic partner on buying a notebook; a free connection for the in-built data card. In a conversion effort, company can offer its broadband user free data cards where they have to buy the connection separate. In the above discussion, the paper has reflected the multi ware technology where by means of more than one inputs; the process has more than one output too. These is common in the in the concept of the macroeconomics. It focuses on overall aspect of the key factors.
These key factors are more inclined to calculate the profit factor of the production process. To estimate the per cent of profit, it required to deal all these activities on the foreground of the sales forecasting. It is a technical measuring tool of the estimated profit, the gap between the cumulative cash flows and the production cost. To put entire concept into motion, the financial analysis will be clubbed with sales forecasting. Here the task shifts from the department of finance to the marketing.
The expertise here projects the sales figure of the product for over the next planning quarters. This turning point sets the figures to achieve, which enables the organization to assess the cost involved, do the profit projection and the other financial benchmarks like, net present value (NPV), internal rate of return (IRR), payback period, manufacturing engineers, R;D associates, financial and accounting specialists etc. In general the forecaster do a long assessment of the product, still it is heavily influenced by the technology and its rapid changing rate.
Is gives a strong insight of the economics of the product where the elements inside the product and the factors inspiring from outside can be calculated to form the price to the customers and the profit to the business. In the elements of economic analysis the sensitivity analysis uses the financial model of product development that responses to the uncertainty of the market. The central factor to evaluate the shift is the change in the NPV due change in the factors in the model. In the macro-environment both the external and internal factors are subjected to the performance of the product valuation.
Internal factors include the activity on which the product development team depends heavily and also influence the team to great degree. It includes the development program expense, development speed, production cost, and product performance. On the other hand, the external factors are the ones that are not so close to the product development process. It affects the process from out side and the team has a less grip over the issue. Particularly at this stage or the situation, the anticipation or the “if” factor becomes more vibrant. It comes with a package of market response, competitor’s moves making it to the competitive market environment.
It also includes the sales volume, and product price, which further leads source: Product Design and Development under argument, whether the pricing is an internal or external factor. Though it has often been observed the external factors are not under the influence of the development team, but are influenced by the internal ones. Regarding the pricing factor, it is a fact understood that pricing of the product is heavily influenced by the competitors pricing policy and the sales volume, which is often made under the supervision of the sales forecasting in the internal environment (Crawford and Di Benedetto, 2004).
This final analysis is promising for the price to profitability ratio of the product proposed. Since the analytical model has a wider exposure to the market, it will help the extended plan of the product development to market and to analyze the economics from customers’ stand-point. Reference Crawford, M. and Di Benedetto, A. (2004). New Products Management (7th ed). New York: The McGraw-Hill Companies. Economy-point. org. (2006). Product (economics). Retrieve April 26, 2009, from http://www. economy-point. org/p/product-economics. html MyRatePlan.
com. (2009). Option GT Ultra Data Card. Compare the Option GT Ultra Data Card to other popular wireless internet data cards from AT;T. Retrieved April 26, 2009, from http://www. myrateplan. com/cool_phones/2057/at;t/option_gt_ultra_data_card/ The Production Function. (2009). Neoclassical Theories of Production. New School. Retrieved April 26, 2009, from http://homepage. newschool. edu/het//essays/product/prodfunc. htm#function Ulrich, K. T. and Eppinger, S. D. (2004). Product Design and Development (3rd ed). New York: The McGraw-Hill Companies.