Paul’s Pricing Dictionary: Cost-plus Pricing (Part 2)

P 75x75Cost-plus pricing, n. gerund, delusional.

So going beyond Part 1 … cost-plus pricing:

– misses psychological price points

– effectively destabilizes the business because the list prices are set with no perception of customer value in mind (if the prices are set irrationally, customer behavior will be irrational)

– assumes that all the costs are cost-competitive, right? Wrong.

– temporarily shields uncompetitive product management, product engineering, procurement and product costing from economic reality

– prevents the necessary and creative tension between pricing (“these products are not cost competitive!”) and costing/procurement (“oh yes they are!”) to help improve the business as whole

– is very apparent to professional purchasers & purchasing depts. and can be exploited accordingly

– would be severely lagged and ineffective when used for product life-cycle management

– can be easily gamed by the competition: it’s very obvious when a company doesn’t set its price competitively

– wait, don’t tell me that with cost-plus pricing you don’t even bother with competitive analysis either ….?

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