Welcome back. Now, let us have a look at cost based pricing. Before we start discussing cost based pricing, we must be clear that what we are trying to do is we're trying to determine the price of a product at which we would like to sell it to the customer. Now, in cost based pricing, what we do is we add up all the costs involved in developing the product or in providing the service and then adding a component of profit on top of that, and then setting that as a price at which we will sell the product to the customer, it can be a product can be a service. Now, the it differs from product to product. For example, if you had tried to sell a pen, then we would take the cost involved in producing a batch of let's say 10,000 pens, and then adding up all the direct costs and indirect costs which have gone into production of these pens, and then adding up costs like cost of creating advertisements.

And then determining what is the ultimate prize of producing this batch of pens, then we proportionately divide this cost across across each of the unit produced and determine the cost of one unit of the pen then we add a component of profit, the profit can be added on top of the cost of the entire batch or an individual component, individual unit. So, that way we will determine okay this is the price of the pen at which you'd like to sell to the customer, it becomes a little bit more different, when we try to cost for let's say a software product. Now in software product, we would take all the different madman's which have gone into producing this software, adding up the cost of management etc which has gone into the development of the software, then the cost which will be involved during the implementation of the software and then warranty period costs all these when added up will determine the cost at which you would like to sell the software.

It can be for a one off project or it can be if it is a software which is going to be licensed across then we will determine what is the batch size you would like to consider for determining the cost of one unit, then we attach a component of profit on top of that and then determine the cost and the price at which you would like to sell the software or we would like to sell the project to the customer. So, this is what we refer to as cost based pricing. Essentially what we do is we determine the price of the product or service by determining the cost issue which is involved in developing this product or delivering the service and then adding a pro component of profit on top of that, so the customer needs to pay for this. The flexibility here is we can markup or markdown the profit person stage which will determine whether we will sell at a low price or a high price.

Generally, we at least try to recover the cost which is involved in developing the product or in providing the service