Pros and Cons of Cost-Plus Pricing: Is It Right For Your Business?
Although many professionals continue to ridicule cost-plus pricing, this simple and efficient model has its place in business. Companies use fixed and variable costs and add markups of their choice, determining the price of their goods. Doing so can increase customer trust and result in steady, predictable profits.
We’ll evaluate the pros and cons of cost-plus pricing models to help you determine if it’s right for your business.
The Benefits
Despite its infamy, cost-plus pricing can be beneficial. Its pros will help you determine whether or not to use it, so let’s look.
Pro 1: Easiest to Communicate
Since cost-plus pricing is inherently fair and does not discriminate against customers based on buying power, it’s the easiest to justify.
Especially during times of high inflation, where cost increases are inevitable but also the worst received, cost-plus pricing enables companies to raise prices with little friction. If your costs go up by 10%, the justification for raising prices is simply, “our costs went up by 10%!”, an explanation easy for customers to digest.
Many sustainability companies take this a step further with radical transparency in prices. They’ll provide a detailed breakdown of their costs and explain to customers how their prices enable sustainability and ethical wages. Doing so increases customer trust and loyalty.
Pro 2: Simple to Implement
Cost-plus pricing can save the day if your company doesn’t have the resources to dedicate substantial time to pricing strategy.
Consider cost-plus pricing when your business’ resources are stretched thin. Ensure you keep tabs on it and monitor costs relative to your markups.
Although simple to implement, cost-plus models have drawbacks that may result in profit loss (more on this later in the article). Before you decide to take the easy way out just for the sake of it, evaluate your company’s resources and do what you can to strategize pricing as effectively as possible.
Pro 3: Stabilizes Price Levels When Widely Adopted
If major competitors in your industry also use cost-plus pricing, these models stabilize price levels and eliminate the need for price wars. Collectively, this lowers all companies’ risk.
Prices remain incredibly stable when higher-cost suppliers offer higher-quality products and vice versa.
Inherent in this is that you research your competitors, although their pricing is a factor ignored by the cost-plus model. If price stabilization is critical to your affinity towards cost-plus pricing, ensure the competition uses the same model.
Pro 4: Encourages Other Buying Considerations
When customers understand that prices reflect actual costs, they begin to consider more than the lowest price when it comes time to buy.
While some will always go for the bargain deal, many other consumers will purchase more expensive products with the understanding that the quality is better.
Pro 5: Creates The Opportunity For Cost Leadership
Companies that can use their unique competencies to lower costs without significantly sacrificing quality will quickly become cost leaders. This balance is difficult to achieve, but it’s massively appealing to customers if you can pull it off.
Costco is the best example of cost-plus pricing leadership. Their average markup is 11%, compared to Walmart’s 24% and Home Depot’s 35%, and Costco promises not to mark up prices by more than 15%.
Despite this, Costco products are known for their quality and generous warranty and return periods. Customers get the best of all worlds, making Costco exceedingly popular. If you can do the same in your industry, you’ll also reap cost leadership benefits.
The Drawbacks
Although there are times when cost-plus pricing works, it comes with some drawbacks. Let’s take a look at those.
Con 1: Deflates Profits
By its very nature, cost-plus pricing limits how much you can profit. Since this model determines the sale price by evaluating all fixed and variable costs, then adding a markup, there’s only so much a company can make.
While it’s up to companies to set their markups, consumers will only accept so much, so there is a ceiling. Generally, if you’re basing your structure not on value but on the costs associated with production, it’s harder to pitch a hefty markup to customers.
Although there’s no official standard, markups are typically in the range of 10-20%. If you’re instead basing the price on value, markups can easily be 100% or more of the actual cost.
Con 2: Doesn’t Always Cover Costs
While cost-plus pricing exists to cover costs, some estimation is required. As a result, this model may only sometimes cover the totality of expenses.
Since sales volume must be estimated, with fixed costs allocated based on that, and because variable costs are, well, variable, cost-plus prices can be too high or low. This miscalculation can result in hefty losses.
As such, it’s essential never to be complacent with cost-plus pricing. Continually evaluate the changing costs of goods and overall sales volume. Never set it and forget it!
Con 3: Ignores Other Key Factors
By its very nature, cost-plus pricing is simple. While this makes it easy to calculate and implement, it also means other essential factors are ignored. Such factors include competitor prices and customers’ willingness to pay.
These other factors often significantly impact prices and profitability. For instance, if a critical competitor has more efficient production than you and is pricing 30-40% lower, customer acquisition will suffer, and profit will go uncaptured.
Without evaluating the many variables that impact price, companies can miss out significantly.
Is Cost-Plus Pricing Right For You?
Considering the pros and cons of cost-plus pricing, it’s up to you to determine if it’s an appropriate pricing strategy.
If you decide a more complex model is necessary, you’ll want to leave that to pricing experts. Pricing strategy leaders can be challenging to find because the field is new, but Jennings Executive has decades of experience matching companies with pricing talent. Let us help you build your pricing team and maximize profits! Learn more today.
Recommended For You
Jennings Executive’s founder discusses Pricing Roles on the Impact Pricing Podcast
Read More >>.png)
6 Tips on Hiring the Best Pricing Strategists, According to an Executive Search Firm
Read More >>
Acquiring and Developing Leading Pricing Talent: Inside Tips From an Executive Recruitment Firm
Read More >>
Redefining B2C Pricing Strategy: Navigating the Shift from Intuition to Data-Driven Decisions
Read More >>
Why Pricing Strategy is a C-Suite Conversation: Bridging Talent and Profitability
Read More >>
Building the Pricing Strategy Teams of Tomorrow: An Insider’s Guide
In a world dominated by ever-evolving market dynamics, crafting the perfect pricing strategy has emerged as the linchpin of business success. With the digital revolution flooding the market with copious amounts of data, a deep understanding of this information has become paramount. Here lies the hidden realm of pricing strategists—those wizards who wield the dual swords of data analytics and market intuition to carve out competitive advantages for businesses.
Read More >>
Evolving Pricing Strategy Roles in 2024
In the ever-changing landscape of business, pricing strategy has emerged as a critical component of success. As we look ahead to 2024, the role of pricing strategy professionals will undergo a significant transformation. Gone will be the days of rigid, one-size-fits-all pricing models. The future will demand a dynamic approach that accounts for rapidly shifting consumer behaviors, market trends, and technological advancements.
Read More >>
Pricing Strategy Recruitment: Finding the Right Talent in a Competitive Market
In today's fast-paced business landscape, finding and attracting top talent is more challenging than ever. With a competitive market and high demand for skilled professionals, companies need to adopt effective strategies to ensure they are successful in their recruitment efforts. One such strategy that has gained significant attention is pricing strategy recruitment. By understanding the concept of pricing strategy recruitment and implementing it effectively, businesses can not only attract the right talent but also create a competitive advantage in the market.
Read More >>
Innovative Pricing Strategies for 2024: A Look Ahead
As businesses continue to adapt to the ever-changing landscape of the global market, pricing strategies have become increasingly crucial for success. In the dynamic business environment of 2024, it is more important than ever for companies to embrace innovative pricing strategies that can help them stay competitive and maximize profitability. In this article, we will explore the role of pricing in business success, the evolution of pricing strategies, the shift towards innovative pricing, key features of these strategies, predicting pricing trends for the future, and implementing innovative pricing approaches.
Read More >>
Emerging Technologies in Pricing Strategy: A Guide for Businesses
In today's fast-paced and ever-evolving business landscape, having a well-defined pricing strategy is essential for success. Businesses are constantly searching for innovative ways to maximize profits and gain a competitive edge. One approach that has gained significant attention is the integration of emerging technologies into pricing strategies. By leveraging the power of technology, businesses can make data-driven decisions, enhance pricing accuracy, and boost customer satisfaction. In this article, we will explore the importance of pricing strategy, the role of technology, and the latest emerging technologies that can revolutionize the way businesses price their products and services.
Read More >>
Pricing Leadership Roles for Top Executives: A Comprehensive Guide
Explore the intricacies of pricing leadership roles for top executives with our comprehensive guide.
Read More >>
Senior Executive Search for Pricing Leadership: Strategies and Insights
Discover effective strategies and key insights into senior executive search for pricing leadership roles.
Read More >>
Executive Leadership in Pricing Strategy: Key Insights and Best Practices
Discover the pivotal role of executive leadership in shaping effective pricing strategies.
Read More >>
C-Suite Pricing Leadership Search: Strategies for Success
Discover effective strategies for finding and securing top-tier pricing leaders in the C-Suite.
Read More >>
Effective Strategies for VP of Pricing and Revenue Recruitment
Discover the key strategies to successfully recruit top talent for VP of Pricing and Revenue roles.
Read More >>
Mastering Pricing Strategy: A Guide to Consulting Roles
Unlock the secrets to effective pricing strategies with our comprehensive guide tailored for consulting professionals.
Read More >>
Optimizing Your Pricing Model for Leadership Recruitment Success
Discover strategies to refine your pricing model for leadership recruitment, ensuring competitive advantage and attracting top-tier talent.
Read More >>
Top Headhunter Strategies for Pricing and Revenue Experts Recruitment
Discover the top headhunter strategies for recruiting pricing and revenue experts in today's competitive market.
Read More >>
Pricing Transformation Executive Search: Strategies for Success
Discover the key strategies for successfully navigating the complex world of pricing transformation executive search.
Read More >>
Hiring a Pricing and Profitability Expert: Key Considerations for Success
Discover essential insights for hiring a pricing and profitability expert to boost your business's financial performance.
Read More >>
Senior Pricing Strategist Recruitment: Key Strategies for Hiring Success
Discover essential strategies for recruiting a top-tier Senior Pricing Strategist.
Read More >>
How to Excel in Revenue Management Leadership Hiring
Discover the secrets to mastering revenue management leadership hiring with expert strategies and insights.
Read More >>
Pricing Optimization in Executive Recruitment: Strategies for Success
Unlock the secrets to maximizing value in executive recruitment with effective pricing optimization strategies.
Read More >>
Executive Search for Revenue Management: Finding Top Talent
Discover the intricacies of executive search in revenue management and learn how to identify and attract top-tier talent.
Read More >>
C-Suite Pricing Strategy Consultants: Unlocking Profitability and Growth
Discover how C-Suite pricing strategy consultants can transform your business by unlocking new levels of profitability and growth.
Read More >>
Best Pricing Strategy for Executive Recruiters: A Comprehensive Guide
Discover the ultimate pricing strategies tailored for executive recruiters in this comprehensive guide.
Read More >>
Effective Pricing Strategy for Executive Headhunters: A Comprehensive Guide
Discover the secrets to setting competitive and profitable pricing in the executive headhunting industry.
Read More >>.jpg)
The Hidden Cost of Poor Pricing Strategy: Why Your Next Hire Matters More Than You Think
Poor pricing strategy costs mid-market firms millions. Discover why hiring a pricing leader is the smartest investment you can make.
Read More >>
The Tariff Tightrope: Why Top-Tier Pricing Talent is Essential for Profitability as Trade Shifts
Discover how escalating trade tensions and tariff complexities threaten your bottom line and how to leverage pricing to optimize outcomes.
Read More >>
Overcoming the Talent Gap in Pricing Strategy Roles
In today’s ever-changing business landscape, pricing strategy plays a crucial role in determining the success and profitability of a company. However, many businesses are currently facing a significant challenge – a talent gap in pricing strategy roles. This talent gap poses a major obstacle for companies looking to optimize their pricing strategies and achieve their business goals. In this article, we will explore the reasons behind the talent gap, the skills needed for pricing strategy roles, strategies to overcome the gap, and the future of pricing strategy roles.
Read More >>
