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To set up a formula for cost justification, you can start with very basic figures that you know from the industry, the customer's industry, or that you get directly from the customer. What you might need to add to the mix is specific information about the customer's margin per unit of product. Maybe also the customer's overhead costs that you're reducing and how that plays a part in unit cost of the product. Because what you're trying to do is save some money or help grow some money from the business, so the more specific factors for that business you can include, the better. The more accurate it's going to be. And hopefully, the more attractive your solution will be to the business owner.
Well, it's all basic math. If you can multiply and divide, add and subtract, know what a percentage is and maybe how to do a ratio then you can do all of this. It's not specific math equations that make as big a difference as simply knowing how to put things in order in the equation. If you're trying to determine the unit cost of a product after you've applied your solution then you need to know where to put the various costs involved.
A cost justification is a pretty simple idea, but the results of a cost justification can give you a lot of paths to follow with a customer. The cost justification is basically trying to justify the cost of the product or the solution that you're selling to the customer. You want the end price, the end result of a cost justification to be something that's acceptable to the customer. So you're selling a product for X amount, but it's bringing Y amount of benefits to the customer. So you have to make sure that the cost and the benefits balance out in favor of the customer.
The key ingredient of the cost justification equation is what benefits the customer is getting, so you have to decide and decide with the customer what sorts of benefits they're going to get. Some may be monetary and some may be non-monetary, but if you can get them to put a dollar value on those non-monetary things then you can come up with a total to cost justify with.
And you usually work that into an actual equation, either with the customer or back at the office when you're preparing a proposal. But the idea is that you present them as many ways to look at something as possible, as many positive ways to look at something. You have to realize that a customer may or may not be placing more value on some figures that you put in there, so you always have to let them decide what to spend. But if you come back with a cost justification and it doesn't zero out, it doesn't save the customer any money, there's still going to be an expense to them. You don't know it, but some of those subjective factors might be much more important than any of the monetary factors for the customer. You make sure that your cost justification includes as many of those dollar figures as it can, but you help present to the customer the benefits so that you stay away from strictly the price issue.
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