Cost-plus pricing, n. gerund, delusional.
From “The Strategy & Tactics of Pricing” Nagle & Holden, 2nd edition (1987 & 1995):
Cost-plus Pricing:
- “carries an aura of financial prudence”
- “blueprint for mediocre financial performance”
- “impossible to determine a product’s cost before a price has been set”
- “cost = function(volume) = function(price) but if price = function(cost) then you create an infinite loop which
canwill lead to the wrong solution (“flawed circularity)” - “creates a catastrophic cycle of a decline when competition increases: volumes decline, then overheads allocated to the products will increase leading to increased prices, which in turn will drive volumes down, increases overheads”
- Cost-plus pricing assumes costs are accurate, which is rarely the case, and, in reality, there is no good way of defining – let alone allocating – overheads:
cost = function(allocations) = function(volume) = function(price), and again, if price = function(cost) then you create an infinite loop which can will lead to the wrong solution (“flawed circularity” – again, speaking in engineering rather than tabloid terms – catastrophic)
- Sub-optimized pricing. Every price created by cost-plus pricing is either too high or too low. Every price could and should be improved.
Previously thought to be archaic but apparently in wider use than originally thought.
