Determine Incremental Cost per Unit

Incremental cost per unit is the floor on your price. You cannot price below your unit costs for any length of time and expect to stay in business. Surprisingly, managers in many organizations do not seem to know the incremental cost per unit of their product or service. If that cost is known, organizations do not seem to do an effective job of communicating it to their managers. I frequently conduct programs on measuring and managing marketing ROI,

Exhibit 25.4 Forecast Likely Actions of Competition

Exhibit 25.4 Forecast Likely Actions of Competition

Source: "Arrow Guide—Value/Cost™ Pricing," The Arrow Group, Ltd., New York, NY, 2008. Used here with permission.

with hundreds of managers in many countries, and few of them say that they know the incremental cost per unit of their product or service.

If incremental cost per unit is not known, then you might use average cost per unit in developing pricing, but keep in mind that average cost per unit will be higher than incremental cost per unit, and in some industries, such as service industries, the disparity between average and incremental costs per unit may be extremely large.

Was this article helpful?

0 0

Post a comment