Looking at Hidden Costs

When we look at the purchase of products or services, we are often confronted with the front end costs – the price structure of a product or service, and perhaps some of the service elements, running costs and associated items like spares prices.

It is true to say that often a full analysis of all these elements is not made, and there can be a reliance on the known figures of the purchase price.

More disturbingly, we often see no evidence of some of the more complex areas of financial impact  being identified and factored into analyses. I was reminded of this when looking at an analysis of new car purchase prices and the depreciation which is experienced against particular brands.

The UK based buyer of some luxury and budget cars could experience a depreciation level of 80% over three years ( see bit.ly/R4ZuNj for a suggestion for those looking for three year old bargains). This has to be built in to a buyers analysis, and put alongside the overall running costs, as it is likely to outweigh the whole of the rest of the running costs of the vehicle.

But what does this mean when we are considering other purchases? Items such as depreciation are built into all businesses running costs as the means of operationalizing some elements of the capital costs in the business. This means that we are, to some extent, accepting the way in which a business chooses to account for its depreciation in a number of areas. As such, we really need to have considered the impact of this element on the purchase we’re making.

Where it becomes a notable part of the running costs of a business, it is worth looking at the policy and approach which is driving that cost. As an example, Apple Inc in its latest Quarterly report shows 10% of their cost of sales as depreciation.

Of course, this only indirectly links to the pricing of a particular product or service; however, we often need to find some sort of lever to add to discussions on pricing, and this may be of more use than many.


About Mark Hubbard

I set up a specialist purchasing consultancy and a business focussing on seeking innovation. I work all over the world with clients, helping purchasing teams develop new ways of delivering value for their businesses. I love thinking about how purchasing works, and how it can be better, and I'd love to share some of those thoughts with you
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