Production Costs Influence Intelligent Pricing Strategy
“There are other internal costs that FEI must consider before setting price,” Marka said. “We’ll go over those next week.”
Today’s FIRE! Point
A company’s prices must at least cover the costs incurred for producing, distributing and selling the product. Fixed costs do not vary based on how much a company produces or sells and include facilities rent, management costs and liability insurance. Variable costs are directly correlated with levels of production and include the cost of materials and workforce labor. Fixed and variable costs together comprise total costs. Generally, the price a company charges for its products must at least cover the total production costs at a given level of production.
FIRE! in Action
Parker Hannifan Eschews Traditional Pricing Models and Succeeds
Donald Washkewicz, CEO of the manufacturing parts supplier, decided to implement a new pricing strategy based on how much consumers would pay, instead of simply adding a flat amount on top of total production costs as had been done before. Following Washkewicz’s lead, one division of this company concluded that it could price 28 percent of its products higher and increase its revenue.
Next week: The FEI tribe continues to discuss the influence of internal costs on overall pricing strategy.