Anyone can calculate what a cost is, but no one knows what a cost ought to be

This is a direct quote from Henry Ford’s, My Life and Work (now out of copyright). This shows his  remarkable thought process on marketing and price based costing. You do not determine what your costs are and then determine the price (like tacking on a margin). You find what the market will buy at different price points and produce the units at costs that are profitable. (See also: Number one pricing question to ask)

Our policy is to reduce the price, extend the operations, and improve
the article. You will notice that the reduction of price comes first. We
have never considered any costs as fixed. Therefore we first reduce the
price to a point where we believe more sales will result. Then we go
ahead and try to make the price.

We do not bother about the costs. The
new price forces the costs down. The more usual way is to take the costs
and then determine the price, and although that method may be scientific
in the narrow sense, it is not scientific in the broad sense, because
what earthly use is it to know the cost if it tells you you cannot manufacture at a price at which the article can be sold?

But  more to thepoint is the fact that, although one may calculate what a cost is, and of course all of our costs are carefully calculated, no one knows what a cost ought to be. One of the ways of discovering what a cost ought to be is to name a price so low as to force everybody in the place to the
highest point of efficiency.

The low price makes everybody dig for profits. We make more discoveries concerning manufacturing and selling under this forced method than by any method of leisurely investigation.

8 thoughts on “Anyone can calculate what a cost is, but no one knows what a cost ought to be

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s