Why “Cost Plus” Pricing Strategy is Bad Pricing Strategy

 

“Cost-Plus” pricing is a common approach used by many businesses.

It’s one that many financial people will argue is the right approach to ensure costs are covered.

Approach is you start with your costs and then add on what you feel is an appropriate level of profit, and that becomes your customer’s price.

It sounds logical and yes it works, but it’s also a dismal failure for both you and the customer.   Yes, you read it correct — it’s a bad plan for both you and the customer.

When you sell based on “cost plus,” your focus is on merely creating enough value for the customer to be willing to pay your cost-plus amount. Result is you undersell.

Customers don’t want to buy anything, regardless of the price. What they are willing to do is invest — they’re willing to invest in anything they feel will create real value for them.

Creating value for the customer allows the customer to see more in what you have to offer.

Example I like to use when I’m working with companies is a cup of coffee. I go to Starbucks and buy their Grande coffee, black for about $2.15. Does it cost Starbucks $2.15? No!

Seriously, I don’t even want to know what their margin is on the cup of coffee.   I pay it and I like it. And I drink the entire cup.

Flip this around and I ask myself if I only paid $ .50 for a cup of coffee, I doubt I would appreciate it as much. And I doubt I would make sure I drank the entire cup.

A price of $ .50 for a cup is probably a lot closer to “cost-plus” than $2.15. Yet, I will pay $2.15.

Would Starbucks sell more coffee if it was $ .50 a cup? We would have to assume yes, but would they make as much variable profit? No!

Not only would they make less variable profit, but the value I would see as a customer would also be less.

Charging $2.15 allows Starbucks to have the variable profit they need to invest in the business to make locations what they are and where they are. By taking the variable profit and reinvesting it, they’re creating even more value for me, the consumer.

Your objective as a salesperson is to maximize price, which allows you to have as much variable profit as possible to invest back into creating long-term value for the customer. 

Copyright 2015, Mark Hunter “The Sales Hunter.” Sales Motivation Blog. Mark Hunter is the author of High-Profit Selling: Win the Sale Without Compromising on Price.

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