How Product Cost Affecting Price Determination?

Product Cost: One of the most important factors affecting price of a product or service is its cost. This includes the cost of producing, distributing and selling the product. Product cost refers to the costs used to create a product. These costs include direct labor, direct materials, consumable production supplies, and factory overhead.

The cost sets the minimum level or the floor price at which the product may be sold. Generally all marketing firms strive to cover all their costs, at least in the long run. In addition, they aim at earning a margin of profit over and above the costs. In certain circumstance, for example, at the time of introducing a new product or while entering a new market, the products may be sold at a price, which does not cover all the costs. But in the long run, a firm cannot survive unless at least all its costs are covered. Product cost can also be considered the cost of the labor required to deliver a service to a customer

There are broadly three types of costs: viz., Fixed Costs, Variable Costs and Semi Variable Costs. Fixed costs are those costs, which do not vary with the level of activity of a firm say with the volume of production or sale. For example, rent of a building or salary of a sales manager remains the same whether 1000 units or 10 units are produced in a week.

Those costs which differ in straight percentage with the level of activity are called variable costs. For example, the costs of raw material, labour and power are straight related with the quantity of goods produced. Let say, if the cost of plywood for manufacturing one table comes to 10 dollars the cost of plywood for 20 tables would be 200 dollars. Clearly, there will be no cost of plywood if no table is produced.