Cost Effects on Pricing Decisions Essay

Pricing decisions for products are affected by many different factors such as demand, cost, competition, strategy, and profitability. Cost is one factor that has numerous ramifications on the final price of a product. Cost includes many aspects including manufacturing cost, damaged goods, theft, transportation, and overhead. When determining the price of a product, one must balance what the market is willing to pay with supply and demand. When examining supply and demand, one can see that as supply increases then demand decreases. Yet, supply does not determine the price of a product. The goal is to base the price on the interaction between a supply and demand equilibrium that is mutually beneficial. Cost is a figure that must be examined on the supply side of the pricing decision. Manufacturing costs is the number one consideration in determining price. The manufacturing process will include a cost cushion for goods that are damaged in the process and a no longer viable. Overhead costs such as administrative costs must be considered in the total cost of a product. Next, the movement of the product to distributors or retailers impacts the cost. Transporting the product has a cost and any goods that get damaged in the transportation process also have a cost to the product. Finally, once the product has reached the distributor or retailer, theft is a common problem that can affect cost and pricing. If a product is stolen, the manufacturer does not receive compensation for all the previously mentioned costs. This loss in compensation needs to be accounted for somewhere along the process so the manufacturer does not lose money. Usually, a cushion is built into the final price of the product that will account for losses such as theft and damaged goods. Product costs are a critical component in the final pricing of a product. Accounting for all aspects of product costs is essential in determining a price that will allow profits to be made.