Cost plus price: Is this value-based pricing? How you determine your price is critical. Far too many companies, especially smaller ones, merely base price on what it costs to produce an item and then add a little bit of profit. There’s no way a company will ever get ahead doing this.

As you read this today, I’m in Shanghai, China, talking to business people about this very problem. People think this is value-based pricing, but it’s the farthest thing from it. Value-based pricing begins with first determining the benefit the customer is going to receive from buying from you. Then you determine price from that. It has nothing to do with the cost of your goods. The way you increase your price is thus determined solely on the quality of your sales force and your overall sales and marketing efforts.

Earlier this week, I was talking to 200 MBA students at South China University of Technology. I emphasized that every element of your company, including your sales force, contributes to the building of your brand equity. It’s this brand equity that helps customers realize an even higher level of benefit from what you are selling. You have to ask yourself these questions: Do we really understand how and why customers buy from us? Do we truly know the benefit they realize? Finally, do we know how much fulfilling this benefit need is worth to them?

When looked at from this perspective, price is so much more than cost plus a little profit.

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