In today's seemingly ancient Soviet times, price formation was a fairly simple affair requiring economists to only know the basics of mathematics. In the absence of competition, the price indicator did not play the role that it plays now. Previously, the price was treated as a more or less objective indicator of the cost of goods, but today the price is a tool to combat competitors. Due to the fact that competition means a lot to the company, and the price setting today is practically not controlled by any rules “from above”, so many different methods for determining prices have appeared, among which the costly pricing method is considered the simplest.
Simplicity is considered the most important advantage of the costly method. The price in this case is determined by adding up all the costs associated with the production of products and the rate of profit that the company wants to receive. The rate of return, in this case, is determined either by sight, or taking into account the requirements of the shareholders of the enterprise, or based on the situation in the financial market. One way or another, the costly pricing method does not require in-depth analysis and complex management decisions.
Besides the simplicity of the method, one cannot fail to notice its greatest honesty and objectivity. In this case, the price that the consumer pays for the goods is easily explained by the objective need to recoup the costs of production, and profit is a prerequisite for stimulating entrepreneurial activity. In turn, a market pricing mechanism that does not take into account such factors as equity can lead to prices including a 100-300% mark-up.
Today, however, price honesty by managers is not considered. But they may be interested in the fact that the costly pricing method does not depend on chance. Whatever happens on the market, the company remains true to its price. Instead of throwing from side to side, which could end in disaster in the event of a series of mistakes, the enterprise chooses, if not always the most effective, but stable and reliable path. This approach is especially relevant for large companies that have their own reliable clientele and are not dependent on market volatility.
Having described the advantages of this method, it is necessary to mention its minuses. The main disadvantage is the consideration of only a small number of factors. Only the desired rate of return is taken into account in the price from the variable components, while the same econometric pricing methods emphasize a number of independent factors that make it possible to make the best decision. Using the costly method, you expose the company to a rather serious risk of "not getting into the price." That is, to put such a price that will look, in comparison with the prices of competitors, is simply absurd. It is especially dangerous if this price is higher than the average market price - sales may plummet.
Another risk is associated with the response of competitors. The costly pricing method makes the enterprise too “readable” for them. While all your actions are easily predictable, it will not be difficult for competitors to develop a method of struggle that makes it easy to squeeze out of the market. You will not be able to flexibly respond to their actions, because for this you will have to revise the entire pricing policy.
Nevertheless, a number of enterprises continue to successfully use the costly pricing method. And even if you consider it a relic of the past, then at least you should calculate the estimated price using this method. After all, it allows you to take into account both costs and profits in full, which is the most important thing for the enterprise in the entire production process.