Governments cannot leave it to the companies to control their emissions as companies don’t have incentives to control their pollutants. Cap and trade is a regulatory system that is meant to reduce certain kinds of emissions and pollution and to provide companies with a profit incentive to reduce their pollution levels faster than their peers. The approach first sets an overall cap, or maximum amount of emissions per compliance period, for all sources under the program (across the industry). The cap is chosen in order to achieve a desired environmental effect. Authorizations to emit in the form of emission allowances are then allocated to affected sources, and the total number of allowances cannot exceed the cap.
How does it work?
- Producers need a permit for every unit of production
- Cap is equal to the total number of permits in the market
- Permits are tradable (market price)
- Leads to known quantity of pollution, unknown price
Cap and Trade has been very successful to reduce emissions overall at a regional and global level. While achieving significant reductions on a regional scale, cap and trade programs can deliver substantial air quality improvements. However, they may not be the solution to every problem. For example, eliminating localized concentrations of pollution is not their primary purpose. The cap and trade approach is best used when:
• the environmental and/or public health concern occurs over a relatively large area;
• a significant number of sources are responsible for the problem;
• the cost of controls varies from source to source; and
• emissions can be consistently and accurately measured.
A good cap and trade program has to include: an effective cap on emissions, accurate way of measuring the emissions without any ambiguity, and simplicity in operations. Markets function better and transaction costs are lower when rules are simple and easily understood by all participants, leading to effective implementation of such programs.
Economic value to the customer is simply the purchase price that customers should be willing to pay for your product, given the price they are currently paying for the reference product and the added functionality and diminished costs provided by your product. Start with the purchase price of the reference product and then add improvements in functionality and cost savings to the customer. You are left with the amount you should be able to charge customers for your product and still take their business away from the maker of the reference product.
The reference product—the one that the customer already uses—costs $300. By switching to your product, the customer gains an extra $350 worth of functionality (yellow arrow). This $350 often shows up in increased profit because your product works faster, works better, appeals more to consumers, and so forth.
By switching from the reference product to yours, the customer will therefore gain $350 worth of functionality improvements (which may or may not mean $350 in profit improvements), plus $100 in lower start-up costs, plus $200 in lower postpurchase costs. (These last two obviously do mean straightforward profit improvements for the customer.) The customer, then, will enjoy a total of $350 + $100 + $200, or $650, in added benefits. A customer who is willing to pay $300 for the reference product should be willing to pay $300 + $650, or $950, for your product. That is the “economic value to the customer” for which the model is named. The EVC is exactly $950, as shown in Exhibit 2—and, in rough terms, that is what you could charge the customer if you wished. In reality, in the example shown in the figure, charging the full $950 for your product would leave the customer perfectly indifferent between the reference product and yours. Therefore, you might want to charge somewhat less than $950—say, $825 or $850. In other words, you want to cede only enough value to customers to make them switch to your product, but not much more. EVC can help you do just that.
This article is directly lifted from http://www.mckinsey.com/insights/strategy/delivering_value_to_customers.
Margin Analysis, also referred as Contribution Analysis, is a tabular data to track the prices, variable costs and profit margins for all the members in a value chain (producer, distributor, retailer) for every relevant product within the firm’s product line and across competitors. This data is mainly used to understand the below:
- Which among the N products is the most profitable?
- What is the relative power of various channel partners or partners in the value chain?
- Are we leaving money on the table?
Definitions for the components of a margin analyses are:
- Retail Price or End-User Price is the price paid by the end-user to the channel member from which the product is purchased.
- Wholesale Price or Manufacturer’s Unit Price is the price paid to the firm.
- Channel Margin is the difference between the Retail Price that the reseller gets from the end-user and the Wholesale Price that it pays to the manufacturer.
- Unit Variable Cost is the sum of all variable costs incurred by the firm that can be directly assigned to the product on a per unit basis.
- Unit Contribution is the difference between the Unit Price and the Unit Variable Cost. It is also called Unit Margin or Unit Profit Margin.
One can also look at the annual contribution by each product and how much it costs the customer annually, if needed for decisions.
A break-even analysis is a key part of any good business plan. It can also be helpful even before you decide to write a business plan, when you’re trying to figure out if an idea is worth pursuing. Long after your company is up and running, it can remain helpful as a way to figure out the best pricing structure for your products.
Basically, a break-even analysis lets you know how many units of stuff—say, how many ham sandwiches, iPhone apps, or hours of consulting services—you must sell in order to cover your costs.
You’ll need several basic pieces of information:
• Fixed costs per month
• Variable costs per unit
• Average price per unit
Once you’ve got your cost data and a target price, plug them in to this formula:
BEQ = Fixed costs / (Average price per unit – average cost per unit)
This will tell you your break-even quantity (BEQ), the number of units you need to sell to cover your costs. Any sales above that are pure profit. Anything below means you’re losing money.
Here’s an example. Suppose you’re turning a jewelry-making hobby into a business. You have $1,000 per month of fixed costs (studio rent, utilities, equipment, etc.). Your variable costs for each necklace are $50 for materials and labor. You’d like to charge $70 per necklace, since that’s what similar pieces are selling for.
BEQ = $1000 / ($70 – $50) = $1000 / $20 = 50
That means you’d need to sell 50 necklaces a month at $70 each in order to break even.
Break-even Cannibalization Rate (BECR):
Now that you understood about break even analysis, let us get to a concept of break even cannibalization. Often, when we launch a new product in the market, some of the sales of the new product could also come at the cost of the sales of our own old product. This is called Cannibalization. It is simply the percentage sales of the new product that come from the old product.
Companies want to understand what is the maximum that they can allow for its new product to cannibalize its old product. Is it fine if my new product eats away 10% of my old product sales. The answer to it is: the maximum cannibalization rate that companies can allow is the BECR.
BECR is the cannibalization rate at which the losses incurred by the company due to loss of old product sales is equal to the gains made by the company due to the new product sales. If the cannibalization rate goes beyond the BECR, the company will incur losses and, similarly, if the cannibalization rate is less than BECR, the company will make profits.
Break-even cannibalization rate (BECR) = (Unit Contribution of the new product)/(Unit Contribution of the old product)
Parts of this article is directly lifted from http://www.inc.com/guides/2010/12/how-to-perform-a-break-even-analysis.html and http://home.ubalt.edu/ntsbarsh/business-stat/otherapplets/breakeven.htm
For some people it comes very natural to manage things. But for people who are not very good at management, the below simple list can come in handy to manage any new challenge or responsibility to get the ball rolling.
The below are a simple list of activities in sequence that are to be followed to manage any challenge in any situation.
1. Gather and analyze the facts of the current project situation.
2. Set project objectives (desired results)
3. Develop possible alternative courses of action
4. Identify the negative consequences of each course of action
5. Decide on a basic course of action
6. Develop strategies (priorities, sequence, timing of major steps)
7. Determine when and how overall progress will be measured
8. Identify and analyze the various job tasks necessary to implement the project
9. Define scope of relationships, responsibilities, and authority of new positions
10.Establish qualifications for new positions
11. Determine the allocation of resources
12. Find qualified people to fill positions
13. Train and develop personnel for new responsibilities/authority.
14. Develop individual performance objectives which are mutually agreeable to the individual and his/her manager
15. Assign responsibility/accountability/authority.
16. Co-ordinate day to day activities
17. Measure progress toward, and /or deviation from the project’s goals.
18. Measure individual performance objectives which are mutually agreeable to the individual and his/her manager.
19. Take corrective action on the project.
20. Deliver appropriate consequences for individual performance.