The easiest approach to figuring out a price is cost plus pricing. It also represents the basic concept behind doing business. You create a product and sell it higher than the cost of making it. When launching products, a lot of companies utilize cost plus pricing as their primary pricing strategy.
However, is it really that effective? Today, we’re going to share with you the pros and cons of cost plus pricing.
Pro: It Hedges Against the Lack of Knowledge
Cost plus pricing is particularly useful when you’ve got no details about the willingness of a client to pay and there are no direct competitors in the industry. Basically, the only information you’ve got to direct your pricing option is the estimation or calculation of your expenses. This enables you to push forward at least a starting price to work from as the client and the market develops.
Con: It Does Not Consider Consumers
The major disadvantage of cost plus pricing probably is that it totally ignores the will of the client to pay. A client needs to be involved to make money. They are the most crucial component of selling anything. Thus, any pricing strategy that does not consider client value is producing a vacuum that is pulling all of the income out of the company.
Pro: It Offers a Constant Rate of Return and Complete Coverage of Expenses
Cost plus pricing guarantees that the complete cost of fulfilling the service or creating the product is covered as long as the person calculating the expenses per item or user is correctly adding up everything. This enables the mark-up to guarantee a positive rate of return. However, there are sometimes a lot of extra expenses that cannot be accounted for. This leads to lowered margins. Luckily, companies can produce a buffer against fluctuations in demand and uncalculated expenses by improving the arbitrary margin. In addition to that, since your rates stay passive, you can estimate income easily for a particular month based on marketing spend, conversion history, and much more.
Con: It Is Not Efficient
The assurance of a target rate of return produces a small incentive for increasing profitability or cutting cost through price differentiation. Stakeholders become passive easily towards pricing. This facilitates atrophy of profits and laziness as the customer and the market keeps on changing. Unless you really can’t spend more time on the most vital factor of your company, cost plus pricing is not perfect for almost every company.
Pro: It Requires Several Resources
Cost plus pricing does not need much market research. Cost of production is something companies are mostly wary of by adding up various labor expenses, invoices, and much more. Companies can then take the added expenses and place a margin on top of that. However, they have to make sure they that the market will bear with the pricing. It is quite simple. Because of this, it is a common tactic among small companies or brands where other factors of production have to take precedent.