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cost of goods sold (COGS), which includes the production.
BOM costs. • Value-Based Pricing: Set the price based on
the perceived value to the
Factors to be considered: customer rather than just the cost.
• Competitive Pricing: Set your price in line
• Profitability: A higher gross margin indicates that with or slightly below competitors
a company retains more from sales to attract customers.
achieved, which can be used to cover operating 4. Profit Margin:
expenses and generate profits. • Decide on the desired profit margin and
• Pricing Strategy: Understanding BOM valuation ensure that the final price covers costs
helps set prices that cover costs and and achieves this margin.
achieve desired profit margins. 5. Regulatory Considerations:
• Cost Management: Monitoring BOM costs helps • Ensure your pricing complies with any
identify areas for cost reduction or relevant regulations or industry
efficiency improvements. standards.
In summary, the BOM valuation provides insight 6. Discounts and Promotions:
into the cost of manufacturing a product, while • Factor in any discounts or promotional
gross margin helps assess the profitability of sales. pricing strategies that you plan to offer.
Both metrics are essential for financial planning and
business strategy. As the saying goes, “Price is a fiction, and
Cost is a fact,” the CFO should try to bring in
cost reduction for better margins, and for that,
the best bet is inventory management and
control.
Pricing
Product pricing involves several key considerations
to ensure you cover costs, remain competitive, and Inventory Management and
meet your financial goals. Here’s a basic framework Control
to help you determine the price of a product:
Having desired levels of all types of Inventories
1. Cost Analysis: (Raw material & Components, Work in Progress
• Direct Costs: Include all expenses directly tied to and Finished Goods) not only ensures delivery
the production of the product “On time in Full (OTIF)” to customers but
(materials, labour, etc.). also brings in better cash flow management.
• Indirect Costs: These are overhead costs not
directly tied to production but The OTIF should happen even to the internal
necessary for operations (utilities, rent and customer, the production floor. The production
administrative salaries). team entirely depends on the coordinated effort
2. Market Research: of internal suppliers such as the warehouse,
• Competitor Pricing: Analyse how similar procurement, and finance teams to achieve
products are priced in the market. OTIF for final customers. Even a delay in
• Target Customers: Price, the target customers are delivering a few components needed for the
willing to pay and what they perceive as fair value. final product assembly can create a big “not
3. Pricing Strategies: immediately” saleable inventory, jeopardising
• Cost-Plus Pricing: Add a markup to the cost of cash flow. Delayed supply – delayed assembly –
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