Cost-Driven Pricing
Customers do not see it as their job to ensure that manufacturers make a profit.
Most American and European companies set their prices by adding up costs and then putting a profit margin on top. And then, as soon as they have introduced the product or service, they have to start cutting the price, have to redesign the product at enormous expense, have to take losses—and, often, have to drop a perfectly good product or service be- cause it is priced incorrectly. Their argument? “We have to recover our costs and make a profit.” But the only sound way to price is to start out with what the market is willing to pay and design to that price specification. To start out with price and then whittle down costs is certainly more work ini- tially. But in the end it is much less work than to start out wrong and then spend loss-making years bringing costs into line.
Price-led costing is an American invention and over one hundred years old. It gave the General Electric company world leadership in electric gen- erating stations way back in the early years of the twentieth century. That’s when GE began to design turbines and transformers to the price the cus- tomers, the electric power companies, could pay. They were designed from the price the customer could pay and was willing to pay; and so the cus- tomer could and did buy them.
Most American and European companies set their prices by adding up costs and then putting a profit margin on top. And then, as soon as they have introduced the product or service, they have to start cutting the price, have to redesign the product at enormous expense, have to take losses—and, often, have to drop a perfectly good product or service be- cause it is priced incorrectly. Their argument? “We have to recover our costs and make a profit.” But the only sound way to price is to start out with what the market is willing to pay and design to that price specification. To start out with price and then whittle down costs is certainly more work ini- tially. But in the end it is much less work than to start out wrong and then spend loss-making years bringing costs into line.
Price-led costing is an American invention and over one hundred years old. It gave the General Electric company world leadership in electric gen- erating stations way back in the early years of the twentieth century. That’s when GE began to design turbines and transformers to the price the cus- tomers, the electric power companies, could pay. They were designed from the price the customer could pay and was willing to pay; and so the cus- tomer could and did buy them.
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