blue ocean question?

Question

hi,
if anyone could help me with this paragraph and show me in computations or formulas, i'll be really glad, kinda slow on understanding this text

To maximize the profit potential of a blue ocean idea, a company should start with the strategic price and then deduct its desired profit margin from the price to arrive at the target cost. Here, price-minus costing, and not cost-plus pricing, is essential if you are to arrive at a cost structure that is both profitable and hard for potential followers to match.

Answer 1

The cost-plus varies from cost-minus pricing in that the unknown variable is different for each business:

Cost-plus pricing:
Cost (known) + Margin (known) = Price (variable)

Cost-minus pricing:
Price (known) - Margin (known) = Cost (variable)

The cost-minus pricing model is quite unusual since a typical model is where one is providing the good/service, where you will know what the cost is. So which industries would be where you know the price and margin but not the cost?

The price is only known for commodity and near-commodity goods and services.

For example, crude oil is a commodity. Integrated oil companies know the price of gasoline at the pump, know the pump's margin (about 8 cents/gallon), know refining margins (about US$2/barrel), know transportation costs and know their overhead costs. So oil companies just need to locate crude oil that is cheaper than the costs and a margin to compensate them for the required return on capital. They can either try and source oil by exploring for it on their own (expensive and risky, but can create reliable supply), acquire other companies (even more expensive, but reliable supply) or buy on the open market (cheapest, but only available over 18 months futures contract timeframe). If the oil companies are buying oil that is too expensive, then they'll either make a loss or have returns that are too low for the risk that they are taking. A case in point is Exxon-Mobil, which decided not to do deep water drilling exploration (when everyone else was) because it was too expensive. This made it harder for competitors to follow because now they are stuck with deep water projects that are structurally too expensive for the current price of oil. Of course, this can all change if/when oil goes back up again toward US$70/bbl.