How Hidden Costs Can Doom Innovation
Price and cost relationships are probably the most important and most difficult factors to address when developing and marketing new products and technologies but are often overlooked. In this column Best discusses new product economics as a marketing discipline. The food industry relies on continuous innovation for its success. Innovation entails product and technology development, commercialization, and market entry. The right price is that which maximizes the benefits to both the supplier and customer. Establishing the right product price requires properly capturing product costs: fixed, variable, and semivariable. As a basic rule, it is best to break down and allocate as many costs as possible to specific products and their related activities as variable, rather than fixed, costs. Cost reallocation should be done before a product or technology is introduced to the market, because miscalculated cost structures inevitably lead to poor pricing strategies and to sometimes fatal mistakes. The financial or economic validation of project cost and pricing considerations is critical to the success or failure of any new product or technology venture. Ultimately, it is up to a company's marketing function to oversee this validation process.