The price tag tells us what we’ll have to pay to receive a product or service, but it doesn’t inform us of what causes the actual price of a product. There are several factors to consider when we think about product price tags, and how they impact what consumers see on the shelf. If we want the cost of goods to decrease, which consumers overwhelmingly do, it’s important to examine the costs of doing so.
Labor
One of the most expensive aspects of production is labor. Simply put, people are required for all sorts of reasons. People put things together, transport, manage and account for all of the products and services we collectively sell. People also cost money, lots of money. Labor is consistently ranked as one of the top costs a company incurs, but labor is worth the money. Good labor is necessary for a company to scale.
Automation, however, helps labor stay affordable. Automation has a flip side, and an ugly one that makes some work obsolete. Technology, however, as consistently added to our economic prospects over time.
Materials
The materials, and restrictions placed on acquisition or sale of those materials, also affect the cost of goods on the shelf. A good example is selective labeling. If one state passes a law requiring labels identifying ingredients or hazards that every other state elects not to adapt, companies doing business in that state must conform to the law and print special packaging for that state alone. That costs money, and it’s highly inefficient.
Materials themselves are also subject to commoditization. Markets are constantly bidding on materials for their value, attempting to speculate and make money trading goods. Companies that rely on certain goods may find their costs rising or falling, which affects the price consumers will pay at the register.
About the Author: Samuel Phineas Upham is an investor at a family office/ hedgefund, where he focuses on special situation illiquid investing. Before this position, Phin Upham was working at Morgan Stanley in the Media and Telecom group. You may contact Phin on his Samuel Phineas Upham website or Facebook.