In most of these business arrangements, companies sell manufacturing products in bulk to existing customers with a contract. That makes it even easier to build a predictable revenue stream over time without requiring a price increase or decrease. Think about the last time you went to the supermarket.
Whether you were buying apples, cereal, or milk, you probably had a good idea of how much each would cost. The simplicity of cost-plus pricing leads to a number of issues for SaaS and subscription businesses:. For subscription companies, the simple answer is no.
The subscription SaaS business model is not compatible with the cost-plus pricing strategy. At ProfitWell, we recommend value-based pricing based off of value metrics. You can still factor in any hard costs associated with running your business, like cloud storage or other infrastructure costs, as well. Choosing this model ensures that your prices will remain aligned with the value you provide to potential customers in a competitive market.
Our Price Intelligently tool is tailor-made to help you build a better subscription pricing model. Chat with one of our pricing experts today to find out how we can help you grow your business.
Cost plus pricing is a relevant product pricing strategy for physical products as it involves adding a markup to the original cost of the product. That training company will add a charge their mark-up on top of the freelance day rate their costs to come to their price. Cost Plus is often the weakest pricing strategy, so while simple and often used in the above examples, we're not advocating it!
One alternative strategy is Competitive Based Pricing. Here you study and research your competitors and factor in their price points when setting your own. With Competitive Based Pricing you are considering your prices relative to the alternatives that are available in the market.
Another strategic option when setting your pricing is Value Based Pricing. Here you are more focused on your customers and are seeking to understand the true value you deliver for them. This is a hard strategy to get right, but it can be one of the most successful in terms of profit if you get it right. And, pricing should never be static - set once and left alone. You need to consistently and frequently review your pricing against aspects from all three pricing strategies to ensure you're getting it right at any given time.
As Cost Plus Pricing ignores any external factors, there are no frameworks or tools that are used in conjunction. You simply have to do some Cost Analysis in order to establish what your overall costs are, and then decide what margin you place on top. A leadership masterclass from an expert leader. How do I set my pricing using Cost Plus Pricing? What is Cost Plus Pricing also known as? What are the advantages to Cost Plus Pricing?
Businesses can then take the summed costs and place a margin on top of them that they believe the market will bear.
As long as whomever is calculating the costs per user or item is adding everything up correctly, cost plus pricing ensures that the full cost of creating the product or fulfilling the service is covered, allowing the mark-up to ensure a positive rate of return. Fortunately, by increasing the arbitrary margin, businesses can create a buffer against uncalculated costs and fluctuations in demand.
Additionally, because your prices remain inert, you can easily estimate revenue for a given month based on conversion history, marketing spend, etc. Essentially, the only data you have to guide your pricing decision is the calculation or estimation of your costs, which allows you to push forward at least a starting price to work from as the market and customer develop.
The guarantee of a target rate of return creates little incentive for cutting cost or for increasing profitability through price differentiation. Stakeholders easily become passive towards pricing, facilitating laziness and an atrophy of profits as the market and customer continues to change. This inward facing approach discourages market research. You should be aware of how much a competing good costs because it can affect your own marketing and pricing strategies.
Cost-plus pricing can encourage shoppers to use factors other than price in buying decisions. When most of us walk into a discount mega-store, we expect to find low prices with lower service quality to match. By contrast, we expect higher service quality and more upscale and expensive products in high-end stores. A final and significant virtue of cost-plus pricing lies in executing a cost leadership strategy.
When the company has unique competencies that allow for an advantageous cost structure relative to competitors, it can use cost-plus pricing to create and deliver the most enticing value proposition of all. It becomes a cost leader, and its low costs, the resultant low prices, and superior customer value become an integral part of its brand identity. Costco has maintained market leadership for decades by using this principle. It widely publicizes this pricing policy.
When coupled with other cues such as a spartan store environment, limited assortments, and bulk buying, its cost-plus pricing creates a powerful image that the customer is going to get great deals at Costco. Despite the ridicule heaped on it by managers, there is a gritty common sense and logic associated with cost-plus pricing that is difficult to dispute. For companies with a cost advantage or an interest in using price transparency as a differentiator, cost-plus pricing is a powerful strategic tool.
For sellers interested in conveying that their prices are fair and building customer trust, cost-plus pricing is an effective tactic.
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