Life cycle costing says companies should price products to cover all costs incurred throughout a product’s life cycle, not just the costs of production.
People tend to fixate on production costs and ignore costs that occur before and after production.
This can be problematic if you set the price based on the product’s cost.
If you underestimate the product’s cost and set the price too low, you’ll have a lower margin (or possibly lose money on each product sold).
So what are the various costs that occur throughout a product’s life cycle?
(1) pre-production costs (upstream costs)
– Product design
– R&D costs
(2) production costs (manufacturing costs)
(3) post-production costs (downstream costs)
– Selling/marketing
– Distribution/logistics
– Service/warranty
– Disposal costs
These costs, plus any other relevant costs, should be taken into consideration when:
-Budgeting the cost of the product
-Setting the price of the product
-Controlling costs throughout the product’s life cycle
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