Saturday, November 17, 2012


Low cost of production, higher volumes, efficient raw material management and one costing model based on specific economic condition followed with an average percentage of growth clubbed very year; all these days are now over or on the path of extension.

These cost management techniques were feasible before 2008 global recession and before the Indian slow down economic phase of 2010.Mass volume based sales proposition hardly exist and even that happens like a magic to specific products. Variable cost is the prime are of focus for the cost accountants but I find that after 2008 recession and 2010 of Indian economic slowdown fixed cost has a huge area to be factored while designing cost structures for products. In this article I will be trying to derive the thought behind fixed cost component which is more important than managing the variable cost. After all the sucess of an enterprise depends upon the cost structures.

Doing business in India it is an cost escalation prospective followed with higher operational cost and volatile inflation affects on product pricing leaves negligible space for small and medium enterprise to design product costing. We cost accountants often ignore the part of distribution cost management while design the cost structure or pricing of a product. After the debacle of 2008 and slow down in India after 2012 customer retention and customer acquisition cost are never being taken into account while arriving at the cost structure. More emphasis is being deployed on raw material and direct cost married with variable cost. But when the product is being sold there is a cost associated with consumer which is hardly being taken into account. All we do is that simply club it with sales and marketing cost. Do we ever break the cost components of marketing cost and drive any new strategies for the efficient cost management linked with consumers. We find companies dropping up product very fast since they dont calculate the numbers matched with
Behavioral Finance.

For customer retention and acquisition are two different perspectives which can only be served in an economy like India through mass selling. Developed economies don’t believe in the theory of mass selling they believe in mass value creation. I India we sell to convert the product into cash but in developed economies selling mean value creation.

Selling products in rural India is a challenge. It’s easy to say that development and expansion and there is stupendous demand in rural India for consumption of products. But rural India is scattered. Hence to built the network over these scattered rural India we need high levels of cost for customer acquisition and retention. We hardly think about these when designing cost structures for products.

Fixed cost is a bigger component over here. Variable cost is left at the door of cost of production. Fixed cost has a greater role to play for rural consumer acquisition and retention.

If ones product does not needs much education to consume will leave negligible cost for use of the product for the end user. But if my product needs consumer education and also training to use the product then simply calculate the cost associated with such product distribution cost. It’s an high fixed cost associated with that product. Then what should be the pricing techniques and cost structure designing process for these products. Well this where we cost accountants needs to drill hard and raise ourselves above the traditional factors of cost designing. When we will design cost structures for product we need to factor in the rural distribution factors which will help to design the profit module for the product. In poor markets we have high level of fixed cost and we have to judge that beyond numbers. Well according to me price cannot be uniform for every market.

Infrastructure cost for distribution of the product in rural India needs to calculate. If the same urban infrastructure can be used for distribution for rural products then this will reduce the burden of higher cost levels for the product. If ones product needs less education in urban areas for consumption and higher for rural then that part needs to be well accounted while arriving at the price of a product.

Mass selling concept can work only best when proper pricing and cost estimation have been built for the products and markets. Otherwise after a certain period the product will collapse before it could enter into growth phase. This will damage the product life cycle and also the project cost.

In between I would like to accentuate the probable areas where cost structures fails while designing the product pricing.

• Higher investments in operational cost followed with wrong market cultural behavior analysis.

• Conventional product sales revenue calculation.

• Customer acquisition and retention cost not being accounted.

• Failed analysis of marketing and distribution cost.

Well the above list should have been big but I kept it short since I want my readers to fill up the gap. Transportation cost is also being calculated in an wrong way. Travel time cost should be accounted since that increases the selling time cost. The more time one spent on transportation the more the product loses its value and hence it pushes up the cost of selling in the long term. (When demand comes supply becomes lag and hence the product loses its market).

I have found that capital expenditure related to distribution of products and the business model itself are substantially higher the cost of the production. In rural India we need the following cost factors like warehouse space, office space, technical staff, office amenities and above all servicing centers. This is why I said in the above lines price cannot be uniform at every place. Now while designing cash flow for an product we need to take into factor all the above mentioned aspects so that we can take up an higher level of discounting rate so that to derive the correct NVP of an product or project. If we don’t take into account then cash flow will take a lengthy time than the projected which will damage the entire business operation.

Low cost of production and mass selling needs to be linked with pushing up the variable cost and leaving enough space for the fixed cost to accommodate followed with improving the gross margins above the average margins which finally makes it possible for selling the product in rural India. In countries like India we need cost structures to be designed in accordance to the culture of the buyers. If one does not push up the variable cost then fixed cost will create a long term sustainability problem.


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