Posted on 01/18/2014 2:24:50 PM PST by rickmichaels
Cost based pricing is relatively simple; you figure out your cost of goods, set a desired margin for each unit, add that margin onto your costs and you have your price. Cost based pricing doesn’t require the detailed level of analysis and value measurement necessary to employ a value-based pricing strategy. Because it’s simple, many companies fall into a trap of cost-based pricing. But as far as smart pricing goes, cost-based pricing strategies are anything but. So if it’s simple, why does it suck? Here are three reasons why:
(Excerpt) Read more at business.financialpost.com ...
It’s amazing how many of them go in all piss & vinegar, and in time all start singing the same tune as everyone else.
Guess the price must be pretty attractive.
Sounds like Harvard Business School - “screw the customer for as much as you can, maximize profit, maximize personal year-end bonus.” However, what it also does is to allow your competitor to undercut your price, steal your market, and perhaps put you out of business.
my old boss set our prices based on margins that would allow the company to pay off all of its debt in a set period of time, given wildly optimistic sales projections. The market did not agree with him. Interestingly, as he raised prices, sales dropped. He felt that this was because our sales reps weren’t working hard enough, and our service was lacking. His proposed solution was to raise prices a little bit more to make up for the revenue shortfall. There are costs to being stupid.
I sense that we disagree. My statement was intuitively obvious to the most casual observer...My happiness is unaffected by your position on the matter. :{)
He only focuses on cost not value. Comparing seats at an arena.
Obviously the seats cost the seller the same but differ greatly in value to the consumer. If not for price, who should get the front row seats? He gets to decide?
You can compete on value or on price or a combination of the two.
Screwing your customers is like eating your seed corn. It’s amazing how fast customers will drop a business that is treating them badly.
Hard enough to stay in business long term without getting a bad reputation.
What is even more fun is the guy who prices to lose money on every job planning on making it up in volume.
This article does sound like one of the anointed, big government types in Atlas Shrugged lecturing the benighted on why and how to conduct business. What consumers are willing to pay doesn’t seem to enter into the calculus. The real world seems to dictate that prices generally must be high enough to cover costs, and low enough that people will pay them.
I agree that it doesn’t really rationalize anything. Rationality is usually lacking in articles that address why certain things “suck”.
FWIW, my understanding is that Costco sells everything at a fixed percentage markup. They seem to have been quite successful, and without screwing over their employees.
That's true, but Costco and Wal-Mart tilt the playing field in their direction by forcing the manufacturers to be paid up front instead take their volume incentives and marketing funds when set goals are reached...
They are both big enough to guarantee volume and marketing objectives...
So they have a 2 or 5 % cost advantage over everybody else...
I am in direct competition with both and have seen copies of their invoices which are at the same cost presented to me...except my rebates, marketing funds have to earned after I achieve my volume objectives...
Legal ...Yes.. Fair ???
We need a group of highly educated people appointed by politicians to dictate price and production. Somewhere they can be centrally located. if only such a system existed it would be super duper successful. I know, as a business owner, I’d welcome the relief of someone else deciding what to charge for my services.
Read the article…it’s all about value based pricing, i.e., what people are willing to pay for perceptions of value received. Just as you say.
This is a freshman level article. No one uses cost based pricing,
Value pricing is better than cost plus pricing, really, what a concept.
Good grief.
The author assumes costs are fixed. Over time costs can be reduced through purchasing scale, relocation of production, substitution of materials, automation, and improving labor productivity.
Pricing is one element of the marketing mix and the determination of actual prices is an element of corporate strategy. When setting the actual price of an item the company considers: competition (current and potential future), costs (current and projected future), requirements of the distribution chain (Tiffany has a different price expectations than Walmart), promotion strategies (high low or everyday low price), product positioning (some brands have higher perceived value and are able to price at a premium to similar products), internal financial/profitability goals, and an intuitive assessment of what the market will bear.
In my experience the only companies successful long term with pure cost based pricing are those who are able to maintain the low cost producer position in the industry and at the same time are willing to accept low margins to achieve high volume. The high volume requirement to cover fixed costs, and the advantages of production scale at high volumes, become significant barriers to competitive entry. However, high volume production scale typically requires undifferentiated commodity products to realize maximum production efficiency and lowest cost per unit. Commodity producers often lose market share to higher cost and higher priced products. An example is the beer industry where microbreweries are gaining share from the low cost producer (Anheuser Busch) even though their products are often priced higher.
It most certainly is not, though your apparent faith in your ability to express yourself in writing is inspiring.
Well, that's a take I hadn't considered. But given the lack of any understanding of pricing [as you mentioned], I just considered it typical hack business journalism by someone who knows nothing of business and isn't much of a journalist.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.