WHAT IS THE PRIMARY REASON TO UNDERSTAND YOUR PRODUCT COST?

 

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WHAT IS THE PRIMARY REASON TO UNDERSTAND YOUR PRODUCT COST? 

Dec 16, 2013
I can answer that with one succinct statement: knowing your product cost is
not so important for setting a price as it is to manage your costs for
operational purposes.
Cost based pricing has many advantages (assuming you know your costs),
it’s flexible, easy to calculate and change, and its very transparent. It also
has many disadvantages, it ignores competition and to a large part product
demand, it forces price increases and decreases if your costs change, and
most importantly, it doesn’t provide any incentive to improve your cost
efficiency.
In my opinion, the disadvantages far outweigh the advantages. The most
important factor in setting the sales price is the sales demand as a function
of your price. This demand is influenced by competitor’s prices, customer
preferences, and the availability of an equivalent product from another
supplier.

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