Conceptual Understanding: Designers need to consider how the costs of materials, manufacturing processes, scale of production and labour contribute to the retail cost of a product. Strategies for minimizing these costs at the design stage are most effective to ensure that a product is affordable and can gain a financial return.
Conceptual Understanding: The economic viability of a product is paramount for designers if they are to get their product into production. Understanding how to design a product to specification, at lowest cost and to the appropriate quality while giving added value, can determine the relationship between what a product is worth and how much it costs.
Value for money: The relationship between what something, for example, a product, is worth and the cash amount spent on it.
Costing versus pricing: Price is how much consumers are willing and able to pay for certain goods and services. Cost is how much it takes to produce goods and services.
Fixed costs
The costs that must be paid out before production starts, for example, machinery.
These costs do not change with the level of production.
e.g. design costs, set up/tooling costs, marketing; initial set-up/tooling costs will be high for first model but may be able to use same tooling and thus reduce costs for subsequent models; design for manufacture will reduce fixed costs; R & D fixed costs will be very high in order to develop new products regularly;
Variable costs:
These are costs that vary with output, for example, fuel or raw material.
Variable costs include all the costs that vary with the volume of production;
e.g. materials, energy; stream lining will reduce amount of material required and could reduce variable costs; variable labour costs can be reduced by setting up manufacturing in countries with relatively cheap labour;
Cost analysis:
This involves the examination and evaluation of the separate elements of cost including profit.
Is a tool used to determine the potential risks and gains of producing a product.
Used by manufacturers to determine the break-even point for a product and can be used to create multiple scenarios for a product.
Allows the feasibility of a product to be established.
Can also be separated into:
Financial Cost Analysis: Analyses how a financial decision will impact an individual or single company.
Economic Cost Analysis: Analysis the impact of a financial decision on the economy as a whole including the environment and society.
Break-even
Is the point of balance between profit and loss. It represents the number of sales of a product required to cover the total costs (fixed and variable).
The number of products that will be made to recoup the set-up costs
A proportion of the fixed costs will be recouped on each product; after the break-even point the profits of the manufacturer will increase;
Alternatively the manufacturer can drop the price to enhance the competitiveness of the product once fixed costs are covered; the manufacturer determines
Cost-effectiveness: The most efficient way of designing and producing a product from the manufacturer’s point of view. Strategies for minimising these costs at the design stage are most effective to ensure that a product is affordable and can gain a financial return.
Businesses have to spend money to make money. They need to invest in design, production, and distribution, and marketing to bring a product to market. The price of the product must take into consideration these costs while also ensuring a profit margin. By doing an analysis of costs associated with the materials, scale of production, distribution and marketing of a product, business can determine whether a product is financially viable to bring to market.
Cost effectiveness focuses on strategies that minimise the cost of producing a product.
Pricing strategies
Designers need to consider the economic viability of their product. If the design is not economically viable then the company is unlikely to bring it to market. Many strategies and tools are used to calculate the product price, and these are often used alongside price setting strategies to determine the price.
Target Costs
A target cost is a marketing approach that assigns an appropriate price to a product prior to its production or manufacture.
In this strategy, the final cost is determined before manufacturing. A profit margin is subtracted to determine the typical manufacturing price. The manufacture then designs and manufactures within this constraint.
Unit Cost
The costs a company incurs to produce, store and sell one product (item).
The costs a company incurs to produce, store, and sell one item. Unit costs include fixed and variable costs.
Typical Manufacturing Price
The price required to manufacture a product. This is cheaper than the price it is sold to a wholesaler or retailer.
This is the price the manufacturer sells the product at. This cost include the total cost per unit (including fixed and variable costs) and a profit margin.
Price-Minus
Based on market research, manufacturers will determine a maximum price that consumers are willing to pay for a product or service. Based on this constraint, the manufacture designs and produces within these constraints.
Wholesale Price aka Cost Price
The price at which a good is sold to a retailer.
This is the cost of the product sold by a wholesaler. Wholesalers sell products in large quantities to the distributors or retailers. The wholesale price is higher than the manufacturer's price, but lower than the retail price. Typically the wholesale price is twice the manufacturing price.
Retail Price
The price at which a product is sold in a store.
The Manufacturers Suggested Retail Price (MSRP) is the price the manufacturer suggest the product to be sold at. This is to standardise pricing across regions. Some retailers may sell below this price in order to attract customers.
Financial Return
Financial return is the profit gained from an investment for the product (investment in plant, staffing, materials, marketing and associated costs surrounding the manufacture and sale). Expressed in $$$ for the profit of buying and selling stocks.
Financial return is the profit made from sales for a particular product after subtracting the costs to manufacture, distribute, and market it.
Return on Investment (ROI)
Compares a company’s profitability with a company's efficiency and is often expressed as a percentage of the net profits, divided by the cost of investment. The higher the ROI the better return
Return on investment is the profit made from a product. It is usually expressed as a percentage. The higher the percentage, the greater ROI. It is usually used to compare investments in order to evaluate their efficiency.
Sales Volume
The number of quantity of goods or services sold/provided over a particular period of time
Sales Volume refers to the number of products sold within a specific time. Sales volume can be organised and tracked according to demographics, region, etc.