Costs and Pricing

ashored
May 30
2 min read

Calculating your costs and determining your selling prices are essential to the successful running of a business. While there is a clear relationship between cost and price it should be noted that cost is not the determinate of the price that you charge. For example, businesses will sell items at a loss (a loss leader) to encourage customers to buy other products. A fixed pricing policy (say, of adding 50% to your purchase price) may be insufficient to cover all costs and could also either under-price or perhaps even over-price your product.

This topic is to help you work out just what is the cost of your product (and also, how to plan using the costings, such as whether to drop a product or outsource it) and what is the price you should sell your goods or services for? It also shows how you can use costing as a planning tool to determine if you should accept a special order or drop a department or product line. The information provided shows the different methods that you can use for pricing your products and what information is relevant and useful for planning and budgeting.

Your ability to accurately determine costs and set competitive prices are vital to the financial wellbeing of your business.
Understanding costs is essential to generating a profit.
Cost analysis and customer analysis will enable the deletion of features that customers do not value.
To accurately analyse costs it is essential to understand the various Cost terms.
Cost classification can be used for budgeting, forecasting and planning.
Costs can be defined in different ways.
Planning can be achieved using Fixed costs and contribution analysis and Cost Volume Profit analysis.
There are also many other cost concepts that need to be understood and how these impact a business and its future Cost planning.
Different types of businesses need to use different costing methodologies for example service industries and manufacturers that have one-off jobs.
While understanding costing is vital to a business, this does not determine the price that can be charged. Pricing is usually a function of the market not cost.