Factors that Contribute to the Cost of a Product

A CD costs 11p to manufacture. This makes the cost of a CD seem like an absolute rip-off but in fact serves to show that the cost of a product is made up from much, much more than the cost of converting raw materials into everyday goods.

Stage 1

Before a product gets to the market an enormous amount of work usually needs to be done:
Research and Development - A product is not simply born. It can take a person or a whole team of people weeks, months and even years to turn an idea into working reality. The designers and engineers will (rightly) expect to get paid for their services and the cost of the prototypes is likely to be relatively high, increasing as they get closer to production. Prototypes are invariably one-off objects with all the attendant costs, both financial and time, that one-off production incurs.
Intellectual Property - This is the cost involved in protecting (patenting) your idea from being ripped-off and copied by other manufacturers. It too is a time-consuming and costly process. "Dyson" is a good example of a manufacturer that spent and continues to spend a good deal of money protecting its ideas so that they have sole right to use the technology.
Market Research - The days of designing and making a product and simply assuming a customer will be delighted with it are long gone. Market Research is a valuable tool to gauge the reaction of potential users to a product. In an increasingly global market, consumer discretion and cultural differences are becoming more important.
Testing - By this I am referring to the costs of testing a product to ensure that it meets European and World-wide safety legislation. Look at the technical manual for any product and you will see that it will comply to several standards covering everything from electrical safety to flammability. These tests can be expensive.
Investment - As a product approaches the stage at which it is ready to be released onto the market, the manufacturer will have to invest in tooling which can range from tens of thousands of pounds for an injection moulding tool to tens of millions of pounds when setting up a factory to produce a new model of car. For a major manufacturer the cost of all this can be offset against the revenue from other products that it might sell but, for a new manufacturer, this is likely to be funded from loans on which their may be heavy interest payments. Eurotunnel is an example of a company which in its early stages was losing one million pounds a day just on its interest payments without even beginning to pay back the original loan; and you think you're skint!

Stage 2

When an object goes into production there will be ongoing costs that a manufacturer will need to pay which include the following:

Raw Materials - Relatively speaking, in most cases the cost of raw materials is not a significant one. Plastics and metals are the dominant materials used in mass-produced goods and even where timber is used, it is likely to be man-made boards manufactured in Europe as opposed to exotic hardwood imported from the Amazon.
Components - Most mass-produced items will consist of more than just some material moulded into a shape. They will have electronic/mechanical components inside them that will, almost certainly, have been made by another company and supplied to the manufacturer. In a modern BMW the main cost is not the sheet metal for the body or the plastics and leather within the car but the cost of the electronic hardware on board controlling everything from how the engine is running to the temperature within the car.
Assembly - Someone or something is going to put the components together or at least make sure that they go together correctly. The great revolution in manufacturing has been automation, but, whilst you might not be paying workers to put things together (labour costs) or supply machines with the raw ingredients, you will need someone to maintain the robots and programme them.
Quality Control - Increasingly important these days because consumers are less likely to forgive a manufacturer for producing a defective product. Automation has made the business of quality control a good deal simpler and more accurate but the sensors which can pick up mistakes still cost money and slow production.
Overheads - The factory itself will be incurring costs which will include ground rent, taxes, insurance, storage, energy, services (water, sewerage), maintenance and security.

Stage 3

Even once a manufacturer has produced the object there will be a number of costs which also must be taken into account:

Packaging - Self-explanatory really, but every shiny new gizmo will need to be placed in a box/container of some sort to protect it from the perils of the next cost.
Transportation - Again, this is self-evident, but the goods will need to be distributed to the retailer who could well be on the other side of the globe!
Advertising - DonÕt under-estimate how much this cost contributes to the overall cost of a product. Last year for every car it sold, Renault spent approximately £500 on advertising. Why didn't it cut the cost of its cars by £500 instead? It could have done but then it wouldn't have had the money in its budget to tell you and you would have been less likely to buy it. Advertising takes several forms from glossy ads in the right magazine, to bill-boards, to product placement (paying Michael Owen to wear your football boots), to Television. The internet is increasingly used as a tool for spreading the message; The Blair Witch Project was a film that was hyped extensively on the net before it became a real hit.
Currency Fluctuations - If you are a global competitor selling hundreds of thousands of units then currency fluctuations can make a huge difference to profits. The relative strength of the pound cost Nissan approximately £2000 on each Nissan Micra (built in Sunderland) sold. Some manufacturers are now insisting that the costs are fixed in Euros to give them more stability.
Discounting - A manufacturer will have a certain period during which it will be able to charge full price for its goods but, there will come a time when rivals are producing better, cheaper versions. A manufacturer will therefore need to lower the price or add more features to tempt consumers back. They will rarely do this so that they are not making any profit at all (unless there is some ultimate advantage) but it will affect the balance sheet.

Stage 4

Okay, you've developed a product from scratch, you've built it in a factory, distributed and sold it, surely there can't be any more costs can there? Oh yes there can:

Warranty Claims - If a manufacturer thinks it has built a competitive product and is confident of its success it will back up that claim with a warranty that will assure the public that should anything go wrong with the product within a certain period, it will be repaired free of charge. This is a cost that will be borne by the manufacturer but will ultimately be reflected in the final cost of the object.
Disposal - Manufacturers are now required to consider what happens to their product at the end of its life. They are expected to show that they have thought how it might be disassembled and recycled to cause the least environmental impact upon disposal.


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