What are the determinants of cost?


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Nicole Manion answered
Determinants of cost are simply all of the variables that affect how much an item costs and whether or not it should be purchased. From the manufacturer's perspective, cost determinants that affect the ability to produce goods or services include cost of rent or property, cost of ingredients, supplies, or staff, and costs of manufacture, transportation, distribution and marketing.

From the customer's point of view, determinants of cost may include the base price of the item, the sale price of the item (if applicable), and any taxes or levies that must be paid on the item. Determinants of cost may fluctuate, and these determinants are sometimes dependent of the cost of commodities. For example, jewelry made with gold will be priced according to the value of raw gold on the open market. Products made with grain may be priced based on the current market value of wheat or oats.

  • Understanding costs

Despite all of the variables at play, items should never be priced for more than the market will bear. However, some entrepreneurs who are new to the cost determinant game may have issues with how to price their items. In general, thorough market research will reveal the prices of similar items, and it will reveal how much consumers are willing to pay for products or services of a certain type. Of course, within each market segment, there will be high-end and low-end versions of products.

  • Market niches determine cost

Through market research and a targeted market niche, manufacturers of goods and services can make excellent guesses regarding the value of their products. Then, they may price accordingly to make their items or services more appealing to the marketplace.

At any price point, there should be a profit margin that covers the cost of all overhead (cost determinants), plus ten or twenty percent pure profit for the manufacturer or service provider.

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