To get the sale price of an item using cost plus pricing, all you must do is multiply each item’s cost with a multiplier. By knowing the cost of each of the items that you’re selling and the profit margin that you’re after, you can easily automate the entire process.
Asides from retailers, many construction companies use the cost plus pricing method. After the cost of each item type is estimated, it’s multiplied by a multiplier to know the amount that the client will have to pay. Despite being seemingly simple, there are many factors that come into play when it comes to a successful cost plus pricing strategy. The amount of time required to do this and the fact that there are new products always coming in make normal pricing methods not feasible. That’s where cost plus pricing truly shines.
When you’re using a cost plus pricing strategy, there are important things to keep in mind. By taking these factors into consideration, you’ll be able to make the most out of your pricing strategy.
Cost plus pricing isn’t for all industries. In some cases, there are pricing strategies that are much better suited to your industry and can give you better margins. If you’re not in an industry that requires some sort of a “massive pricing” solution, there are other strategies that can provide you with much better results.
If you have few unique products, having a pre-set markup is not a good idea. You are simply missing out on higher profits. In addition to that, you risk having prices that are less attractive compared to your competitors.
Using the cost plus pricing strategy effectively requires a deep understanding of the “costs”. There are many factors that contribute to an item’s actual cost. Things like staff salaries and bills are indirect costs that should be taken into consideration.
By doing so, you’ll be able to determine the real cost of an item to create a proper markup with solid profits. Failing to do so can make you lose money without even noticing, so this is something that you need to pay extra attention to.
Cost plus pricing: Advantages and disadvantages
Like all things in life, cost plus pricing has pros and cons. Deciding whether this pricing strategy is right for you or not depends on whether the advantages outweigh the disadvantages.
Advantage: Simple and Scalable
From all the advantages of cost plus pricing, being simplicity and scalability and probably the most important. Once you figure out your multiplier’s value, pricing items is as simple as filling the blanks.
If you’re in a business with tons of items to price, this method can make your life a whole lot easier. Instead of putting in pricing efforts for each item individually, you can do that for bulks of items at a time.
Being able to use this method for lots of items with minimal calculations make this pricing method highly scalable. Pricing tasks that require large teams can be carried out with a much larger workforce when using cost plus pricing.
Disadvantage: Smaller profit margins
How much is your product worth? When using cost plus pricing, it’s worth the cost plus a reasonable margin. However, when using other pricing strategies, it’s worth what people are willing to pay for it.
Your costs shouldn’t put a limit on your profits. Unless you’re working in an industry like construction, your customers don’t really care how much making the product costs. If you’re able to lower your production costs somehow, you should be able to reap the benefits.
With cost plus pricing, this isn’t the case. The result is you settling for a price that could be much lower that what your customers think your products are worth. In addition to making you lose money, this pricing strategy kind of caps innovation in your company.
As the pricing model is based on adding a markup to the products’ cost, finding innovative ways to lower the production costs becomes pretty much irrelevant. If you’re in a market where innovation and brand image are considered a factor, this is a pricing strategy that you better avoid.
How to use advertised price
- Know the cost price of the product that you’re selling.
- Conduct market research to know the price of your competitors.
- Decide on a suitable profit margin for your product.
- Set the product price.
- Analyze the market reaction.
- Adjust the price if needed.
- Used for pricing multiple items at the same time where conventional pricing methods won’t be feasible.
- Never underestimate the importance of market research.
- Take hidden costs into consideration when setting your multiplier.
- Make sure you set a price that’s competitive enough.
- Always check if your prices are up to date with the market.