Pricing with the Customer in Mind

Estimating the price a client would pay for a product first, and then aligning production and investment costs to that value, is the premise of the Price-led costing strategy.

Friday, November 3, 2017

Ariel Baños, a specialist in price management, explains that knowing in advance how much you can charge for a product or service, or at least having an estimate, is a key element of the Price-Led costing strategy.

"... Knowing how much I can charge lets me to see what level of costs the company can incur in order to sell a product or service profitably. This approach is known as 'Price-led Costing'.

Baños exemplifies: "...Imagine that a bakery decides to launch a new product: a sweet bread for Christmas. It would not be a good idea to start by evaluating costs, such as: ingredients, labor, packaging and advertising, among other things. The first step should be to define the target priceLet us suppose that 10 dollars is very attractive price for the usual customers at this bakery. Therefore the development should take into consideration this number from the beginning, and align all of the costs and investments, so that, when added up, they allow for a satisfactory result to be obtained at the predefined sale price. The kind of ingredients to be used, the type of packaging, the mode of production, in short all of the costs, will be defined according to what the bakery can charge for its product."

Read the complete article by Ariel Baños, director of "Price-led costing: a customer-based approach" (in Spanish).

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