Cost or Price?

Henry Ford had this to say when he talked about mass producing his car:

"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 the point where we believe more sales will result. Then we go ahead and try to make the prices. 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 that you cannot manufacture at a price at which the article can be sold? But more to the point 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…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."

Not surprisingly the only company that follows it to the heart in the US is walmart and no special prizes for guessing that they are one of the enduring value creators. Ford itself lost its creators message somewhere along the way. The only other large scale follower of this is China - the manufacturers ask you whats the price you want for the product and then they arrive at that price by a matching cost structure.

Of course the big difference between Ford's time and now is that - there was only one acceptable quality for a car ie the T-ford. unlike the explorer, mustang etc etc today. Similarly for the chinese there are multiple quality levels - so you can have a battery priced at INR5 costing the manufacturer INR1 that lasts for 5hours and you can have a battery priced at INR11 costing INR3 but that lasts for 5 days.

So is Ford's thought process outdated today? I dont think so - the main underlying theme of his thought was that make a product at a cost that it will sell for. In todays world - nobody wants to sell at a price that will make the product sell - they want super profits and obscene salary costs to be added to the price of the product and make it "not sell" - and then they say there is a recession. Funny aint it?

I had always counseled that the price for any article is what the buyer is willing to pay - nothing more nothing less. This helps the cash to flow and one to remain in business - what do you think?