6 Benefits of Production-Based Pricing for Manufacturers

How do you determine the selling price of your products?

Pricing products correctly is essential for any business, and manufacturing is no different. How you price your products will make a big difference regarding profitability.

Production-based pricing provides multiple benefits for manufacturers when determining how to price products. Utilizing these benefits can help your business remain competitive and profitable.

Production-Based Pricing Benefits

Cost Control

Production-based pricing helps a manufacturer control costs by accurately calculating the cost of production and setting a price that covers all costs and provides a profit.

Obviously, it is easier to control costs when you understand how much it costs to make a product. This is a constant process due to changes in supply and labor costs.

Predictability

Forecasting and budgeting will help manufacturers predict their profit margins and make necessary adjustments to production processes to maintain profitability.

Constantly monitor costs and profits and use these figures to continue making future predictions. Ignoring changes in production costs can dramatically impact profitability and competitiveness.

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Transparency

Using production-based pricing, the cost of production is transparent to both the manufacturer and the customer, making it easier to understand the reasons for the price of a product.

It makes sense that if the cost of materials to create a product goes up, the price of the product will go up as well to maintain a company’s profit margin. With supply chain issues still near the top of most news cycles, most consumers are aware of material shortages that cause increases in costs to manufacturers.

If material costs keep you from pricing your products competitively, make sure to look at all your processes to see if there are ways to cut costs in other areas while still maintaining production levels. Don’t just use high material costs to justify pricing products higher than competitors.

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Consistency

Basing the price of a product on the cost of production, manufacturers can ensure that prices remain consistent, even as costs change.

Maintaining price consistency can be difficult but is appreciated by customers. Significant fluctuations in price can discourage consumers and cause uncertainty and possibly distrust toward your company. Do your best to maintain pricing while keeping profits acceptable.

Better Decision-Making

Having a clear understanding of the cost of production, manufacturers can make informed decisions about what products to produce, in what quantities, and at what prices.

The more information you have access to (i.e., material costs, employee benefits and wages, overhead, etc.) will provide you with the data you need to make intelligent decisions that will benefit the company. If you don’t know what these numbers are, find out now.

Improved Competitiveness

By setting prices based on the cost of production, manufacturers can remain competitive in the market while still ensuring a profit.

In today’s world, where consumers have many options when shopping for their needs, it is essential to be as competitive with your pricing as possible while maintaining profitability. If you find it difficult to be competitive and profitable, it is time to look at your processes and supply chain and find ways to cut costs.

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Keep Your Prices Right

With supply chain and labor issues still factors in today’s world, it is more important than ever for manufacturers to keep a close eye on production costs. This constant attention will allow for timely decisions to be made regarding pricing to stay competitive with other sellers and still keep the company profitable.

If you’re interested in learning more about production-based pricing or other ideas that can benefit your manufacturing company, get in touch with one of our accounting professionals today.