Cost-Based Pricing

Consumers do not aim for producers to make a profit. American and European companies typically set prices by summing up costs and adding a profit margin. As soon as a new product or service is launched on the market, they have to lower the price and improve the product design, thus incurring losses. As a result, a company often abandons a good product or service simply because the initial price was set incorrectly. Their argument: "We must cover costs and make a profit." But the only right way to set a price is to start with the one at which the market is willing to buy, developing the specification for it. Subsequent cost reduction requires a lot of effort in the initial stage, but it is much better than starting with an inappropriate price and incurring losses for years while increasing costs. The American invention of starting with the price at which the market is willing to buy is over a hundred years old. This is exactly how General Electric became a leader in producing power plant equipment at the beginning of the 20th century. GE began selling turbines and transformers at prices that power generation companies could afford. The manufacturer started from the price the buyer could and wanted to pay. Therefore, the buyer could purchase and did purchase the goods. TIP OF THE DAY: Analyze your company's pricing policy. Align prices with the real needs and capabilities of consumers, then form a group to develop a cost structure that allows for the necessary profit at the established price.