Really broad question, and probably really simple, but when a product (of any kind) finally hits the shelves, what makes it the price that it is? How is it determined?
In: Economics
It depends on exactly what type of product but you start by figuring out how much of a product you can make and what components it takes to make them. When you figure out what it costs to build (include the price of labor, parts, packaging) you have sort of a “base” price. Then you add the cost of logistics, and if you’re going to sell it in stores a retail cost (meaning mark the price up to pay the store for selling your product essentially), and even the individual store can mark it up. But also you have to take into account the quality of your product vs your competition if there’s a similar product out there, and make sure it’s in an acceptable range that a consumer would pay for it.
Mass production can make overhead much cheaper, as well as underpaying your labor force.
Then of course you have products like medication that can be wildly jacked up because they know people will pay whatever the asking price is because they just want to live…
All the various costs of design, development, manufacture, transport, storage, staffing, utilities, shelf space get added up.
And then every company has its own rules about how to decide the profit margin. But basically you take the above cost, and add the profit margin to it.
Value of the materials and supply and demand. You can see these rules in effect during national emergencies where a case of water is $60. Also implied value with products from Apple or a clothes designer like Louie Vuitton.. They make garbage products but can charge $1000 over actual value simply due to the logo on the bag or phone.
1. The cost of the raw materials
2. The cost of the manufacturing process
3. The cost of distributing the product from the factory to stores
4. The profit margin made by the manufacturer selling to the store
5. The cost of operation for the store (employees, store rent)
6. The profit for the store
There are a lot of comments in here about the cost of the inputs to the product. This is wrong. Outside very specialized and explicit contracts, called “cost plus” and almost exclusively used in government/military contracts, the price has nothing to do with the cost.
Products get their final price by the seller guessing what they can charge that will maximize profit (like /u/ViolettPapillon describes). This is entirely based on the buyers’ willingness to pay, NOT what the product cost to produce.
The only role cost plays is that if your suspected price is lower than your cost, you don’t enter the market at all (because you think you’ll lose money). As long as you reasonably believe you can charge more than it costs, you will price it as high as you think the buyer will pay. This is called “value pricing” and is FAR more common than cost-plus.
Cost to produce is really the minimum. Yes, there’s the concept of loss leaders, but for the most part if a product can’t fetch a price above production cost it doesn’t get sold. This is one of the main benefits of economics in general – resources are not put into products economically inefficient to produce (i.e. products people don’t really want).
Let’s assume you can meet that threshold. I’ll start by saying there’s entire industries that go into figuring out exactly how much to charge for given items. But these are the types of things looked at. Let’s use the example of selling shaving cream.
1. Cost of competitors’ shaving cream. For example, if my competitor sells for $5 a can I probably can’t charge $30 a can, no matter how good it is.
2. Cost of similar items which can be substituted for shaving cream. If there’s another product for $5 a bottle that can serve in place, although not as good, again I probably can’t charge $30 a can.
3. Benefit of product, whether or not people are willing to forgo shaving cream entirely. The customer will just accept a cut up face instead of just paying the money.
4. Quality of your shaving cream over others. If my shaving cream works better than my competitor, I can charge a premium. If it’s works worse, than I probably have to accept some type of discount on their price.
5. Strength of your shaving cream’s branding and marketing ability. When people walk into the store, they recognize my brand from all my commercials and are willing to pay a little more than my competitors whom they don’t know.
Notice how everything revolves around looking at the market and making judgements based on what other people are doing.
In practice, it’s sometimes trying stuff to see what works. Focus groups may be used, maybe you ask, “If our shaving cream left you with smoother skin would you pay a dollar more per can?” Maybe you raise the price and see how that impacts sales.
The basic principle is that for each increase in price I’ll lose some amount of sales, so I am always trying to find that sweet spot where price and sales level brings the maximum dollars.
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