What is product cost and how to calculate (with example)

Understanding product cost is essential for businesses, whether dealing with one-off products or SaaS subscriptions, as it helps in making informed decisions about pricing, profitability, and investment prioritization. Product cost involves expenses related to development, production, and maintenance, including direct materials, labor, and overhead, and is crucial for determining pricing strategy and product profitability. Unlike product costs, period costs refer to expenses not directly tied to product development, such as marketing and administrative costs, and are expensed in the period incurred. Calculating product costs involves adding direct labor, direct materials, and overhead, which can then be divided by the number of units produced to find the per-unit cost. Factors influencing product cost include the scope of the product, developer costs, team structure, equipment, and software purchases, among others. To manage high production costs, strategies like customer research, creating a minimal viable product, optimizing the tech stack, and maintaining robust quality assurance processes are recommended. Ultimately, understanding and optimizing these costs are vital for maximizing profits and ensuring the success of the product in the market.