Are you selling a new product or perhaps increasing the price of a current product? Are you curious if you should make the investment into a new storefront or location? Price analysis and a cost analysis are similar terms but one applies to the consumer and the other, the producer. Both support strategic planning and decision-making for the next steps of your business.
What is Price Analysis
A price analysis is the process to study the consumer, the end-user and their appetite for your product. How much is your customer willing to pay for your product before they look for an alternative? Price analysis typically begins by comparing prices of alternatives with similar benefits. Importantly, price analysis does not consider the cost to produce your product, only the reasonableness of the price.
Pricing is the most important marketing decision you will make in your business. But pricing is more than just marketing – it is also a financial strategy. Your pricing will affect your capital plan, working capital, and fixed assets. Your choice in pricing is a critical element of growth. Hiring a professional outsourced CFO to provide a pricing analysis will trickle down to other aspects of your financial strategy like your annual budgeting process and your revenue forecast.
What is Cost Analysis
Cost analysis is a broad term referring to a collection of studies performed on businesses to break-down or aggregate costs related to a product or process. Calculating CAC, for example, is a way to analyze cost. Although there are several types of cost analysis, they all provide a deeper understanding of the cost of a business operation with the end-goal of reducing or scaling such cost.
What are the types of cost analysis?
There are several ways to analyze cost that help to develop a strategy for your business. The outcome of the analysis will determine whether the project is financially feasible or if you should pursue another project.
- Estimates
- When planning a new product or service, sales will commonly forecast their cost expectations and then validating them over time with actual data.
- Lifecycle Cost Analysis
- Lifecycle cost analysis calculates the expected total cost of owning an asset over time. This is a great tool for planning to make a large purchase like a warehouse, a machine, or even a strategic hire.
- Cost-Benefit Analysis—(CBA) analysis
- CBA compares the benefits of a decision with the cost of that decision. CBA techniques contemplate the amount of return on investment as well as the pay back period.
- Efficiency
- Cost-efficiency measures are typically based on a formula of Output / Input x 100.
- Cost Effectiveness
- Have you ever tried to measure happiness? You can spend money to try to increase happiness but happiness is not a financial result. Cost Effectiveness measures other success metrics like on-time delivery and customer satisfaction.
- Costed BOM
- A costed bill of materials aggregates unit-costs for a product across three categories: labor, material, and overhead. Costed BOMs are useful for understanding unit margins, setting sales targets, and planning growth.
Depending on the business need, financial professionals like CFOshare, will use several cost analysis methods in tandem to help owners and managers consider opportunity costs and alternative courses of action.
What is customer acquisition cost analysis?
CAC, or customer acquisition cost analysis, is the average cost to acquire one new customer. A CAC analysis is a tool commonly used by SaaS companies to validate their cost of growth.
Marketers, advertising platforms, and business growth consultants all offer calculations of CAC to evaluate sales, marketing, and advertising efficiency. CAC is included in the types of CBA techniques that founders, managers, and financial professionals use to measure their business.
How can a fractional CFO help with pricing and cost analysis?
A critical portion of the cost and price analysis is a clear and precise recommendation. If the analysis does not definitively lead to a value — your fractional CFO should be implementing additional methods. All elements of your business should be considered, including staffing, operations, capital planning, and growth or exit strategy.
