I have received a number of e-mails regarding my August 10th posting (Double Marginalization and the Point of Ideal Price Viability) requesting clarification of my theory. In line with the old saying that a “picture is worth a thousand words,” the following graph will hopefully illustrate the basis for my conclusions. (NOTE: due to space limitations I am not able to incorporate the actual graph into this posting. To obtain a copy of the graph send me an e-mail at jhansen@procureinsights.com with “Graph” in the subject line.)
The data behind the graphic output is an amalgam of 13,000 transactions over a 12 month period involving the purchase of MRO products. (Note: MRO products usually demonstrate a Dynamic Flux Characteristic).
The majority of analyses focus on what I refer to as the Successive Sell, which reflects the graduated or sequential increase in pricing through the transaction stream to the end customer, and the Collective Profit which illustrates the gap between the profit and sale price of the most current transaction. This is an example of limited price variability knowledge whereby most organizations’ point of reference is confined to this narrow range.
The PIPV however tracks the actual Cost/Sell price and Supplier Profit on an individual transactional basis throughout the entire transaction stream. Through this expanded window of visibility you are better able to reliably identify the Point of Ideal Price Viability. In the case of the graph below, the point of convergence (re the point where declining profit and increasing sell price meet) is $500. Therefore the “range of price reasonableness” is between $400 and $600. This is a substantially lower price than the $1,200 the end customer actually paid.
(GRAPH)
Once again I would like to emphasize that the PIPV is influenced by a number of factors such as individual commodity characteristics (re Dynamic Flux and Historic Flat Line). However, the methodology I employed to formulate the PIPV theory can be consistently and reliably utilized with a 98% rate of accuracy in terms of outcome – that is the successful identification of the PIPV.
If you would like to learn more abouth the Point of Ideal Price Viability or commodity characteristics, please feel free to visit my bio listed within this site.
Supplemental Material Double Marginalization and the Point of Ideal Price Viability - To learn more about this author, visit Jon Hansen's Website.
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