Replacement Cost vs. Selling Price

September 1, 2017

What is replacement cost and does it affect the price you sell an item for? 

The association office continues to receive phone calls from buyers who would like to introduce a new product and who have an idea of what it will retail for. 

When asked if they have had any prototypes made from commercial companies, they have the deer-in-the-headlights look because they might not realize they need a prototype. Prototypes are important because they save companies money in the long run. 

We recently had a company purchase and pay for 750 units of an item without exploring their actual costs. The buyer called two months later and explained that the most they could sell the item for was $40 less than they paid for them. I explained that you can not make that up on volume. 

People often think they can back into a selling price without having any idea of what their actual replacement cost is.

I ask these people, “How do you determine the cost you will sell your item for?” 

Without purchasing a small sample run from multiple manufacturers who have a good understanding of their cost structure, you and your business are in for a rude awakening. 

When companies examine what the Affordable Care Act costs US manufacturers, they are shocked because health care cost increases alone are increasing the bottom line costs by 18% or more in some cases. This increase does not take into consideration such items as taxes, utilities, etc. 

Companies that do not have a good handle on their cost structure might be busy as ever, but could be loosing money in the long run. Having a good understanding of the bottom line is really the only way a company will survive in the global marketplace. 

Since 1929 the WPMA has been focusing on programs and services to help a company compete and remain profitable. Helping members understand their costs in paramount to their survival. 

For more information people can contact Philip Bibeau, Executive Director at 978-874-5445 or visit www.wpma.org

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