How To Get A True Understanding Of Product Cost
Having a great idea for a business is truly exciting and there’s nothing quite like watching your vision turn into a reality.
Of course, however, there’s a lot of hard work that needs to be done before dreams can come true and it’s essential that you do really drill down into your idea so that you can be fully prepared come launch day, brimming with confidence and knowing that you’ve done all you can to ensure that your venture will be a successful one.
For product-based brands, there’s one aspect of running a business that can make or break them… and that’s product costing. It’s absolutely vital that you have a solid understanding of just how much production will set you back so that you can avoid a whole host of issues, everything from profit loss to over-budgeting.
Naturally, you’re excited about your new offering and want to bring it to market as soon as you can, but if you rush the process you could potentially end up damaging your brand and not see the sales figures you’d like to.
Remember – it’s easier to drop your prices than it is to raise them, so you’ve got to get it right to ensure you’re selling your products for what they’re truly worth, factoring in your initial outlay and expense, as well as the product value itself.
The good news, however, is that by putting in the hard work at the beginning and gathering all the necessary data you need, you’ll be able to make more informed decisions later down the line where your products are concerned, so it’s certainly worth taking the time to prioritise product costing if you can.
But how do you go about working it all out?
In simple terms, you can work out your total product costs by adding together your direct material and labour costs, as well as your manufacturing overheads… and there you have it! Sounds easy enough, doesn’t it?
However, this doesn’t quite go far enough and to really gain a deep understanding of the true cost of a product – and what your true profit margins will be – you need to get to grips with the concept of cost accounting.
Cost accounting takes all sorts of different factors into consideration, everything from everything from individual ingredient and material prices to market conditions and supplier location, all of which will help you predict potential changes that could impact your products.
This, in turn, allows you to take advantage of opportunities, find other suppliers if necessary or hold back on manufacturing during price increases.
What about product development?
You also need to think about product development and what goes into this when weighing up the costs of your individual goods.
Make sure you form a complete bill of materials, taking an inventory of all the raw materials, parts, components, assemblies and subassemblies you need to make each product.
Once the products are made, you’ve then got to have them tested out, another cost that needs to be taken into account. You’ve also got to cover incoterms, globally recognised three-letter trade terms that detail the delivery arrangements of products from sellers to buyers.
And then there’s landed cost, which is the total amount it takes to create new products, transport them and put them in front of customers, including shipping, raw materials, import duties, shipping insurance and so on.
It’s very involved and there’s a lot to do, but one of the key benefits is reducing the amount of waste your products create, as well as helping you to budget and estimate other processes related to your goods.
This all sounds quite complicated…
Well, yes, it’s not necessarily all that easy to work out your true product costs, but it’s an endeavour that’s certainly worth pursuing – and not one that you’ll regret in the long run.
And, of course, there’s plenty of help out there in the form of amazing technology and software that can ensure you get the job done quickly and get the job done right.
PLM management is a great place to begin if you’re not sure what sort of software would be most appropriate for product costing.
No matter how amazing your product is, you won’t enjoy the success you’re looking for without profitability, but PLM tools can support your cost and value strategy at the very outset of product development, giving you greater cost transparency of your products, which allows you to cost optimise them far more easily.
When you have an overview of your entire collection right out in front of you, you’ll be able to see immediately where you’ve been focusing too much of your efforts, allowing you to then turn your attention to other potential product markets.
This will, in turn, prove attractive to buyers because they’ll be able to see that the collection works symbiotically and the different products complement each other well, which is sure to prove attractive to consumers in the end.