Let me start this blog with a question.

How a seller view price or cost?”

“Can a seller practically derive at effective Profitability by only considering cost?”

If we are taking the opinion of the buyer, pricing would not be an issue. Buyers or consumers will typically use the terms price and cost synonymously. For instance, a purchase manager could tell to its counterpart, “The price of that Mountain Bike was only $250.” Or it could be just as easily say, “That Mountain Bike cost us only $250.”

However, from the opinion of the seller/vendor, the difference between prices and costs is quite important. A price is what a business charges, and a cost is what a business pays. Therefore, for a Store Manager may set a price of $250.00 for a Mountain Bike, may price a pair of Brake Calipers for $40.00, or may sell Disc Brake Caliper at the price of $25 per piece. But, in all situations the manager must also focus to his costs. These costs include, what he pays the manufacturer per set of disc brake, what he pays employees to stock spares on the shelves or to sell them, what he pays for rent, for display and lights, for advertising, and so on and so forth.

For effective profitability, pricing and profitability management is essential. Where, pricing and profitability management is a systematic, yet dynamic approach of recognizing the influence of pricing on revenue & margin and managed tactically over time to ensure reasonable prices for the value your businesses creates.

Accordingly based on better pricing and profitability management business can manage price negotiation effectively have better control in true profitability.

Hence, for seller/vendor, although a “price” may go by many names or unit of measure. One name it should not go by is “cost”.

In subsequent blogs, I will dig more into need and way of effective pricing and profitability management.

First in the sequel we have Without a proper understanding on pricing, can business have vision for future?

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4 Comments

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  1. ' MoazzaM '

    Hi

    Price and cost are two completetely different terms for vendor but for customer they are same. I like the way you explained this and let me tell you one interesting fact that my Boss told me about my current company. There was a business unit which was always showing loss before SAP. They couldn’t get the route cause that why this business unit in always in loss while all others are in profit but when they implemented SAP they came to know that their costing was totally wrong and they were selling materials below their cost price but after SAP they changed their selling prices gradually to overcome the loss.

    Wrong costing is something that can cause the shut down for business so every CO consultant and costing department must be experts in their area.

    Thank$

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    1. Jyoti Prakash Post author

      Moazzam,

      Thanks for your comment and adding on your experience..

      Lets look at another example, Google Glass “costs” $150, where in market it is “priced” at $1500. Why $1500? Now, where cost plus pricing went? As tech is new and manufacturer is looking for premier customer and accordingly priced that at premium. Once that premier customer segment is near to saturation, they will have the revise the price to preach into new customer segment. The same happened to desktops, laptops, smartphones, smart-watches, etc.

      This post was to make fellow member aware that its just notion that business not always think of “cost plus pricing”. Pricing itself is big subject as like cost.

      Well, you can treat this post as an introduction to my upcoming post on pricing and it’s management.

      Thanks, JP

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      1. venu gopal

        Dear JP Sir

        explained well manner About Price And Cost  

        And eagerly waiting for your upcoming Post ……Thanks a lot For your Information 

        (0) 

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