Research by McKinsey & Company revealed that over 60% of all manufacturing companies employ a cost plus approach to setting prices. PROS, a provider of pricing and revenue management software, just released research findings on service parts companies and found that more than 75% of the executives surveyed use cost-plus pricing, while more than 30% recognize the practice as problematic.
Using a cost plus approach exclusively to set prices is a sure way to leave money on the table and lose valuable sales. Three things can happen with cost plus pricing strategies and two of them are bad…you may leave money on the table, over-price the product and lose the sale, or get lucky with a price that maximizes profits while satisfying the buyer. We prefer our clients use a value based pricing approach that estimates the economic value delivered to the client and allows sales teams to have meaningful discussion with buyers about value and ROI.
However, in arriving at a value based price, cost plus pricing has its place. Cost plus is typically used to set a price floor by using a minimum margin that is acceptable for the product. The price floor prevents discounting from eating away at margins and provides an acceptable limit. Pricing floors are particularly useful in pricing made to order products where prices may be set on a daily basis. Including cost plus pricing strategies in your approach helps to protect the downside of discounting.
Do you have pricing questions? Price Point Partners is a team of senior-level pricing experts dedicated to solving the pricing challenges of manufacturers and distributors. Contact our price consultants for a free 30 minute consultation at 330.342.0923, or fill out this form and a pricing expert will be in touch.