Selling cost is incurred in various forms, of which advertisement is the main one. It differs from the production cost which is incurred to produce goods.
It refers to the total expenses incurred to produce goods and services. They are in the form of rent, wages, salaries, interest and normal profit. It also includes depreciation and payment for the inputs which are not normally included in the above mentioned payments. Thus expenditure incurred to produce the goods and their delivery to retail shops is called Production cost.
The retail selling cost is a sum of production cost + selling costs + margins for distributor and retailer + govt. taxes and levies.
The objective of selling cost is to promote sales. Each producer tries to convey the message that his product is better than the rivalsâ€™ product.
The production cost and the selling cost follow a pattern, if drawn in the form of a graph in relation to the output. For every product there is an optimum output where the costs incurred are the lowest. If APC denotes average production cost and ASC denotes average selling cost then average cost of the product ( total) AC = APC + ASC. The producer tries to maintain level AC taking leverage of fluctuations in increase and decrease of APC and ASC.
Effects of Selling cost:
Selling cost influences the commercial desire to purchase a commodity. They are not only made aware of the existence of the commodity but are also told that the commodity in question is better than its substitutes. If the demand increases for a product the producer is able to sell more at the same price. Selling cost succeeds in making the demand more elastic. If the producer is able to reduce the selling price by controlling the selling cost then he will be able to sell more quantity and vice versa.
Selling cost increases the profits. Though selling cost increases the firms total cost the increase in the total revenue surpasses the increase in cost thus bringing in more profit.
Conclusion of the above theory:
The above is purely theoretical but an appropriate application can be made in practice by producers. The total cost pattern assuming forms a U curve plotted on a graph. The optimum cost shall be at the lowest value of cost which is indicated on Y-axis as cost which forms the lowest point or lowest apex of the U. Following the curve at a lower cost level shall be the production cost. The width between the two U shaped curves will be the net sales costs or sales administration costs. These may remain more or less uniform for a product and even sometimes may even decline. The entrepreneur must be skilled enough to use these curves in determining the price of his product which should be attractive enough for the customers to patronize it.