Cost method of pricing. The pros and cons

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2020-07-03 02:10:08

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In today's seemingly ancient Soviet times, the pricing was simple enough, requiring economists only knowledge of the foundations of mathematics. In the absence of competition, a measure of prices did not play the role that he plays now. If before price have been treated as more or less objective indicator of the cost of goods, today the price – is a tool of struggle against competitors. Due to the fact that competition means  the company very much, and the prices today are virtually not controlled by any rules ”top”, and there are so many different methods of determining prices, among them cost pricing method is the most simple.

It is easy I think the most important advantage of the cost method. The price in this case is determined by adding all costs associated with the production, and the profit margins which the company wants to. The rate of profit, thus, is determined either by eye, or with the requirements of the shareholders of the company, or on the basis of the situation on the financial market. Anyway, the cost plus method of pricing does not require deep analysis and complex management decisions.

Besides the simplicity of the method, it is impossible not to notice it the most honesty and objectivity.  In this case, the price that the consumer pays for the product, is easily explained by the objective necessity to recoup the production costs, and profits is a prerequisite for stimulating entrepreneurial activity. In turn, the mechanism of market pricing, not taking into account such factors as justice may result prices, including 100-300% markup.

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Today, however, the fairness of price leaders is not considered. But they might be interested to know that the cost plus method of pricing is not dependent on accidents. Whatever happens in the market, the company remains true to its price. Instead of throwing from side to side, which can end in disaster in the case of the number of errors, the enterprise picks though not always the most effective, but a stable and reliable way. This approach is particularly relevant for large companies with own reliable clientele and not dependent on market volatility.

Describing the advantages of this method, it is necessary to mention about its cons. The main disadvantage – accounting for only a small number of factors. Only the desired rate of return is reflected in the price of variable components, while the same econometric pricing methods focus on a number of independent factors, which allows to make the best decision. Using cost method, you expose the enterprise is at serious risk ”not to fall in the price”. That is, put a price that will look compared to the prices of competitors, is simply absurd. It is especially dangerous if the price is higher than the average market price – sales can rapidly fall.

Another risk is associated with the response actions of competitors. Cost method of pricing makes the company too "readable" for them. While all your actions are easily predictable, for competition will not be difficult to devise such a method of struggle, which makes it easy to squeeze out of the market. You will not be able to flexibly react to their actions, because it will have to revise its pricing policy.

However, a number of enterprises continues to use the cost method of pricing.  And even if you consider him a relic of the past, at least, should calculate the estimated price using this method. Because it allows to take into account the costs and profit at full size, which is for the enterprise the most important in the whole production process.


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Alin Trodden - author of the article, editor
"Hi, I'm Alin Trodden. I write texts, read books, and look for impressions. And I'm not bad at telling you about it. I am always happy to participate in interesting projects."

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