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You are here: Home / 4 Professional Arts / a Governing Skills / Management / Price-Driven Costing Rather than Cost-Driven Pricing

Price-Driven Costing Rather than Cost-Driven Pricing

December 3, 2009 by mattperman

Here’s a good word from a BusinessWeek article summarizing Peter Drucker’s insight on how to price a product:

Properly pricing a product is no easy exercise. It involves a complex bit of calculus that must take into account not only a business’ up-front investment but also the ongoing costs it expects to incur (as it moves down the learning curve and, presumably, becomes more efficient); the position of its competitors; and the crucial interplay between price and volume.

It also requires a degree of self-restraint. “The first and easily the most common sin” among businesses, Drucker wrote in a 1993 article, “is the worship of high profit margins and of ‘premium pricing.'”

Historically, many companies ignored these factors. They set the price of something simply by adding up all their expenses and then slathering on top as much profit as they thought the market would bear.

As Drucker pointed out, such “cost-driven pricing” was backward. In the end, he concluded, “the only thing that works is price-driven costing”—that is, figuring out what customers believe a product or service is worth and then designing the item accordingly (with a sufficient profit built in to support sustainability and growth, which does not necessarily equate to the highest price that could be obtained).

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About Matt Perman

 

I am the director of career development at The King’s College NYC, co-founder of What’s Best Next, and the author of What’s Best Next: How the Gospel Transforms the Way You Get Things Done. This is my personal website where I blog on four of my favorite topics: theology, apologetics, culture, and living in New York City.

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