What the product cost knowledge benefits are is a question that arises for two reasons.
The first motive is that many prices are unrelated to the sales object’s cost. From the pricing orientations listed in another post (cost and margin, supply and demand, competitors, customer-perceived value, constituted authorities, and illicit prescriptions), only cost and margin consider the product cost.
Secondly, many professionals need help with mastering and using that information.
Before clarifying the usefulness of the cost per product, it is convenient to remember that we are referring to the full cost of the sale object. In other words, the total unit cost (composed of direct and indirect expenses), regardless of the allocation method, the nature of the base cost, and the valuation criteria of its inputs—topics we will address in another post.
The principal utility of full cost depends on the price-determining agent (the price-determining agent is the one who has the power to set the price, OK?).
Whenever the price-determining agent is the offerer, he uses the sale object cost to calculate its price and other sales conditions. When the price-determining agent is the buyer, the market, or a constituted authority, the offerer uses the cost to compute the profit margin that the price allows obtain.
Moreover, detailed knowledge of the unit cost permits the price manager to offer more competitive final prices using different arrangements. For example, knowing the impact of the quantity produced or sold on the portion of the fixed cost allocated to each product, he can propose price-quantity alternatives without reducing the product’s profitability and may even improve it.
That knowledge also enables the pricing manager to question the costs of raw materials and processes in use—between them, those arising from make-or-buy decisions and existing indirect expenses—and collaborate with other company areas to reduce them.
Another benefit of knowing the product’s full cost and profitability margin is identifying the origin of the profits or losses. That is, make clear what product items, sales channels, market segments, types of operation, sales agents, and even customers give rise to good or bad results for each product. From there, to investigate which production and marketing alternatives to invest in, modify, discourage, or even eliminate.
In addition, to the extent that the offerer has information about his competitors’ costs, compare them with his own and know which ones to review.
C. L. Eckhard, author ofPricing in Agribusiness: setting and managing prices for better sales margins.