A competitive product must address factors such as cost, performance, aesthetics, schedule or time-to-market, and quality. The importance of these factors will vary from product to product and market to market. And, over time, customers or users of a product will demand more and more, e.g., more performance at less cost. Cost will become a more important factor in the acquisition of a product in two situations. First, as the technology or aesthetics of a product matures or stabilizes and the competitive playing field levels, Competition are increasingly based on cost or price. Second, a customer's internal economics or financial resource limitations may shift the acquisition decision toward affordability as a more dominant factor. In either case, a successful product supplier must focus more attention on managing product cost to fit customer needs.
The management of product cost begins with the conception of a new product. A large percentage of the product's ultimate acquisition or life cycle costs, typically seventy to eighty percent, is determined by decisions made from conception through product development cycle. Once the design of the product has been established, relatively little latitude exists to reduce the cost of a product. Decisions made after the product moves into production account for another ten to fifteen percent of the product's costs. Similarly, decisions made about general and administrative, sales and marketing, and product distribution activities and policies account for another ten to fifteen percent of the product's cost. When a company faces a profitability problem and undertakes a cost reduction program, it will typically reduce research and development expenditures and focus on post-development activities such as production, sales, and general and administrative expenditures. While not suggesting that these are inappropriate steps to take, the problem is that it is too late and too little. Most of the cost structure in a company has been locked into place with the design decisions made about the company's products. A cost reduction or profitability program has to start with the design of the company's products at the very beginning of the development cycle. http://www.npd-solutions.com/dtc.htm