Either as the primary goal of a product development project, or merely as one of the constraints: cost price always matters.
November 13, 2018
In some markets a lower cost price, which enables a low selling price as a key differentiator, may be essential for success.
And in high-end markets, the higher margin that a low cost price allows may mobilize the stakeholders in the sales chain.
Achieving the optimal cost price starts with making the right conceptual choices. Being critical while selecting product features can make a huge difference. Some features may prove to be expensive to develop and implement, while others may be realized at almost zero cost.
When detailing the design it is vital to make smart choices in construction, manufacturing methods and materials. This means being aware of the cost of manufactured parts, purchased components, as well as cost of assembly and transport. All the while keeping your eye on the goal: to create a rational, well thought-out design.
"You can nearly always improve the cost price by making an extra iteration in the project. This has to be balanced against the added development cost and time."
- Robert Barnhoorn, director Spark design & innovation
Further, we need to make sure that the -what we call- technical cost price, translates into an actual cost price. This involves working close together with the supply chain, selecting and involving suitable suppliers.
Invest to save
Investing more up front can often decrease marginal cost. For instance, high-pressure injection molding involves higher tool costs than vacuum casting, but has a much lower cost price per piece. Additionally, the development team can be asked to spend more time to find an even cheaper solution, or to further optimize design-for-cost. Many of these decisions have to be made during the product development process. Finding the appropriate cost price strategy depends on the clients' commercial strategy, financial situation and intended market approach.
Increasing the value
Saving on product costs seems like a good idea - and it basically is. But reducing product costs is never free. At the very least it consumes part of the budget and other available resources. And it may erode the quality of the product offering. So it's always wise to consider whether to spend time and money on decreasing cost, or on increasing value.
Increasing the value (real or perceived!) of the product can have a considerably positive impact on the sales volume or on the price that customers are willing to pay. Not to mention, the improved brand image. Quantifying the resulting gains in revenue and margins may show a much larger positive effect than a few percent of cost savings.
You could say that cutting product cost is a good idea if you're sure that it does not negatively affect sales volume or sales price. Otherwise, it may be smarter to spend your budget making a better, more valuable product offering, increasing sales volume and/or sales price.