According to the dictionary of marketing, selling cost refers to the expenditure, which is done by a company. This includes the promotion as well as the distribution of the product. The primary motive is to convince buyers to buy your product instead of opting for something else.
To put it across in simple terms, selling cost of a company means the salaries paid out, commissions needed to be handed out, the rent to put up at a showroom, advertisement costs as well as the expenses involve for other promotional means.
4 major components of selling cost
From the above explanation, it can be understood that selling cost has a number of components. These components are all linked and affect the smooth flow of functions in making a product profitable for the company.
1) Salary and Wages
The very first component is the salary and wages that are paid to workers and labourers. This is very important because, without these essential people, there will no product. The existence of the product is vital or obviously, nothing will be there to be sold. The payout of these workers is determined by how much profit the company is making and how many hours each worker needs to put in.
Commissions refer to the part out of the profit that is paid to middlemen. This may be to those who help in the marketing and promotion of the product. For example, the payment made to an ad agency if the ad copy designed them works wonders and increases sales.
The rent of the showroom is another vital component of selling cost. This implies that venues at a central location call for higher expenditure than those, which are somehow a little, concealed from footfall. It is assumed that a central location is likely to pull more traffic. In case one does not have a showroom of their own, they too need to pay commissions and rents to other departmental stores and outlets.
4) Advertising & Promotions
Advertisements incur a huge expenditure for every company. There are several means of advertisements such as the traditional newspapers, radios, magazines, billboards, banners, celebrity endorsements and other similar means. Other than the means, this also includes the payment to advertisement agencies and ad copy designers.
Promotions: Though you may think that advertisements and promotions sound the same, they are different. Promotions refer to the publicity that is done through pamphlets, offers, discounts, collaborations, etc.
The assumption on which the concept of selling cost is based :
The basic assumption on which the concept of selling cost is based is that consumers do not have adequate information about products in the market. This leads to the belief that potential customers can be swayed into buying your product. It is thought that advertisements and the outward appearance of products can lure buyers to invest in it. Novelty is known to gain the attention and that is why the means of publicity and methods to reach out to the masses are updated regularly. The primary motive is to be on the consumer’s mind.
Fickle-mindedness of the customers is assumed. Their lack of complete knowledge is taken advantage of and products are sold to them. The key is to lead them to believe that the product is just what they desire to satisfy their needs.
Difference between selling cost and production cost
The difference is very clear from their names itself.
- Selling cost, as explained before is the price which is paid by a company in order to make people buy its products. This means that the payment is made to engage in the making of the product as well as its promotional activities to reach out to the maximum target buyers. It can be termed as the “creation of demand”. On the other hand, production cost refers to the expenditure that is made in the manufacturing, handling, transportation routes and means, storage and delivery of a product. This implies whatever it takes to get the product into being and existence.
- Selling cost greatly emphasizes on the sales department. This implies advertisements. Advertising is a wide area where there are components such as the various means of advertisement and agencies that are hired to design and publish ads. At times, companies have their own ad-making department and do not need external help for the designing of the copy. On the other hand, production cost refers to the payout for making the product available to different areas in the expanse of operations. This includes warehousing services as well.
- Lastly, it is imperative to understand that selling cost refers to the process of making others desire a product. This means to make others demand it. It is the tactic that is employed to make more and more want to buy it. This leads to the increase in a company’s profit. On the other hand, the production cost is a process of making the product meet the demands of the population.
Thus, it can be clearly said that while selling cost is product centred, the production cost is customer focused and aims to satisfy the needs of the customers.
What is average selling cost?
To explain it in simple terms, this refers to the cost put in per unit of product. This means that if you draw a curve to show the selling cost that is invested by you, you will get a u-shaped curve. Initially, you will witness an increase in sales when compares to the selling cost. But, after a point, it drops to a low. However, it again gains momentum and increases.
This shows that there will always be a particular amount of investment needed to carry out the components of the selling cost. This certain amount is the average selling cost. This may increase or decrease, depending on the sales and profits of the company.
Difference between selling cost and the cost of sales
As already explained, by now you already know that the selling cost refers to the to the expenditure which is done in order to get customers to see potential in a product and buy it. The components have been discussed above (point-wise) to make it easier for you to understand and implement wisely. Now, you must be wondering what is a cost of sales. Read ahead to understand what cost of sales is in simple terms.
The easiest explanation of the cost of sales is:
Cost of sales = (Cost of finished goods in the beginning inventory) + (Cost of goods manufactured) – (Cost of finished goods in the ending inventory)
Yes, that’s how simple the calculation of the cost of sales is. Please note that under no circumstances shall the cost of sales include any expenses of selling or administrative expenditure. Only the above stated three criteria and values determine the final cost of sales.