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Cost Plus Pricing - Too basic or the way forward? · Enhance.training

• 0:03
  SPEAKER_00: Hello, in our last pricing podcast I took you through four key reasons why you need a clear pricing strategy, why you'll get more sales and more profit if you invest time in your pricing.
• 0:17
  SPEAKER_00: However, I didn't actually tell you about any of your pricing options, so let me rectify that now.
• 0:24
  SPEAKER_00: In this pricing strategy series, I will take you through three founding pricing methods and why you should or shouldn't use them.
• 0:33
  SPEAKER_00: We're going to first look at the pricing method that about 80% of businesses use, cost plus pricing.
• 0:39
  SPEAKER_00: And in this podcast I'm going to tell you what it is, why it works and doesn't work, and where it works best.
• 0:47
  SPEAKER_00: My name is Anna Taylor, and if you're new to this podcast, enhance.training provides online business courses to help professionals, managers, and business owners improve their performance.
• 0:59
  SPEAKER_00: For over 15 years I've worked in finance alongside sales and marketing teams.
• 1:04
  SPEAKER_00: I've seen firsthand the importance of getting pricing right.
• 1:08
  SPEAKER_00: From training sales forces and marketing teams in margin and pricing to co-designing and calculating the impact of an entirely new price back architecture and pretty much anything to do with pricing in between.
• 1:21
  SPEAKER_00: Now they say that well, pricing is either your most powerful weapon or your worst enemy, and I want to help make sure it's the former for you.
• 1:30
  SPEAKER_00: If you like this podcast, please share it with friends and colleagues and visit us at enhance.training for more great tips on transforming your performance.
• 1:43
  SPEAKER_00: Pricing strategies are the approaches that businesses use to price their products correctly and in line with current market demand.
• 1:51
  SPEAKER_00: They help you to discover the best possible price for your product depending on how you want to position it.
• 1:57
  SPEAKER_00: Now price is fundamental to your business and it's the most important factor in profitability.
• 2:03
  SPEAKER_00: There are three groups of pricing strategy because pricing is either cost-based, demand-based, or competition-based, and there are many other strategies sitting within these.
• 2:14
  SPEAKER_00: Now, when you're deciding on a pricing strategy, you should assess all the options open to you and the reasons for choosing one strategy over another.
• 2:23
  SPEAKER_00: So this pricing strategy series explores some of the key strategies for getting the price of your product right.
• 2:30
  SPEAKER_00: And we're going to start with cost plus pricing.
• 2:33
  SPEAKER_00: Why?
• 2:34
  SPEAKER_00: Well, because that's where most people start, well, and actually usually where they stop too.
• 2:39
  SPEAKER_00: But before you blindly copy the method that all those other businesses are using, let's stop and explore it to see if it really is the right method for you.
• 2:50
  SPEAKER_00: So what is cost plus pricing?
• 2:54
  SPEAKER_00: Well, it's the simplest method for pricing a product, really.
• 2:58
  SPEAKER_00: In fact, it represents the basics of doing business.
• 3:01
  SPEAKER_00: You make something and then you sell it for more than you spent making it because you've added value by providing that product.
• 3:09
  SPEAKER_00: And the method itself is also very simple.
• 3:12
  SPEAKER_00: You just add together all the costs for a product, add your markup to make your price.
• 3:18
  SPEAKER_00: And for your added markup, you may choose an absolute number to add on each time, or probably more likely a percentage.
• 3:25
  SPEAKER_00: So what we're doing in this strategy is looking at your internal costs and adding a bit to ensure you make a profit.
• 3:34
  SPEAKER_00: So who uses cost plus pricing?
• 3:38
  SPEAKER_00: Well, I recently saw the results of a business survey that found that out of thousands of SME businesses questioned, about 80% use cost plus pricing at least as part of their pricing strategy, and even though many of them know there are better methods out there.
• 3:53
  SPEAKER_00: Many of these businesses choose cost plus pricing as their main pricing strategy when releasing new products or when they have little time to spend on pricing, for example.
• 4:04
  SPEAKER_00: And traditionally, it's been the fashion brands that have really relied upon cost plus pricing for its simplicity and convenience.
• 4:11
  SPEAKER_00: However, due to the increased consumer awareness of retail prices, especially online, I mean we're all very familiar with searching out for the best prices now, aren't we?
• 4:21
  SPEAKER_00: And this means that this method is no longer as relevant as it once was because you just can't ignore the competition anymore.
• 4:29
  SPEAKER_00: But why is it great?
• 4:31
  SPEAKER_00: Well, there are plenty of reasons the cost plus pricing strategy is so popular and it does have its advantages.
• 4:38
  SPEAKER_00: So first of all, as I've said, it's extremely easy to apply.
• 4:42
  SPEAKER_00: It's straightforward to list your products, their costs, and then use a simple formula to add profit and create your price.
• 4:50
  SPEAKER_00: You don't need any specialist skills, and it can be done straight away once you have your cost information.
• 4:56
  SPEAKER_00: And think about it, for those that have to price hundreds or even thousands of products at the same time, this method's clearly a lifesaver, as the method is not only simple but also time efficient.
• 5:07
  SPEAKER_00: And it can be vital for companies to keep their costs down, as this method takes up fewer resources, both in terms of time and money.
• 5:16
  SPEAKER_00: And secondly, if calculated correctly, it makes sure that you cover your costs and that you do make money on each sale.
• 5:24
  SPEAKER_00: Think about it, if you had simply copied a competitor's price without analysing whether you can afford to, you could have been setting yourself up for trouble.
• 5:32
  SPEAKER_00: Please don't do this.
• 5:33
  SPEAKER_00: You need to know and understand your costs so that you know what you can and can't afford to do.
• 5:40
  SPEAKER_00: And finally, well, this method is justifiable to customers.
• 5:44
  SPEAKER_00: Not that I would ever advocate sharing your costs or your costing methods with your customers, but if you are ever challenged on price, you would have the option being very clear why you cannot go below a certain price.
• 5:56
  SPEAKER_00: You could even say, Well, my costs have gone up 5%, so I'll have to pass that cost extra cost on to you.
• 6:02
  SPEAKER_00: I don't actually think this is the best way to handle a price increase, but I will talk about this in another podcast.
• 6:09
  SPEAKER_00: And be warned, never give out any cost information to competitors or customers.
• 6:16
  SPEAKER_00: But it's not all good, and I personally think this method is a bit too basic.
• 6:21
  SPEAKER_00: So let's have a look at some of the watch outs or the disadvantages now.
• 6:25
  SPEAKER_00: Well, first of all, it completely ignores competitors' prices.
• 6:29
  SPEAKER_00: Now it's all very well if your cost plus price is in line with your competitors, but what if it's not?
• 6:37
  SPEAKER_00: What if your cost plus price comes out much lower?
• 6:40
  SPEAKER_00: If you sell at that price, granted, you'll probably take sales away from your competitors, but you will also have lost out on potential profit as you could have priced your product higher.
• 6:50
  SPEAKER_00: And if your price comes out much higher than your competitors, what then?
• 6:55
  SPEAKER_00: You would not be as attractive and may not get sales as consumers are used to paying less.
• 7:00
  SPEAKER_00: You can't just ignore the competition.
• 7:03
  SPEAKER_00: And secondly, it neglects product value.
• 7:06
  SPEAKER_00: So just because it costs the same to produce two items doesn't mean they should be priced exactly the same, especially if they deliver extremely different values to the customer.
• 7:17
  SPEAKER_00: So if you ignore the value you're giving to the consumer, you may well be leaving money behind on the table because they may well have been willing to pay more and you will have lost out.
• 7:27
  SPEAKER_00: And finally, there is a watch out in how you do the method rather than the method itself.
• 7:32
  SPEAKER_00: Because you must be careful to include all your costs in your calculations, as it's too easy to miss them out.
• 7:38
  SPEAKER_00: Now, this might be okay, albeit not ideal, if it's something really minor, but not if it makes a significant difference.
• 7:45
  SPEAKER_00: I know of businesses that have failed because they didn't calculate their costs properly.
• 7:50
  SPEAKER_00: So whenever I use this method, I advise people to add up all those business costs, including time, to really understand what you need to cover with your pricing.
• 8:01
  SPEAKER_00: There are product-related costs, ingredients, packaging, production, and don't forget those costs for shipping and distribution, including extra packaging.
• 8:11
  SPEAKER_00: I then also like to add up all the costs that aren't necessarily product related, but they are costs that your business has to pay whether you sell any items or not, because you need to know that any profit you make on your items can cover these costs too.
• 8:27
  SPEAKER_00: And remember to ask yourself other questions about your costs.
• 8:31
  SPEAKER_00: Think about the future.
• 8:33
  SPEAKER_00: Are your costs likely to go down if your volume increases?
• 8:37
  SPEAKER_00: Are the raw materials like to be more expensive in the near future?
• 8:40
  SPEAKER_00: Take all the information you have into account in order to be really thorough with this method to make sure that your pricing is as best as it can be.
• 8:51
  SPEAKER_00: So even though cost plus pricing is not really my favourite method, it certainly does have its merits as it is simple and easy to understand.
• 8:58
  SPEAKER_00: However, using cost plus pricing as the only pricing strategy will reduce your competitive strength as it doesn't take competitors or consumer behaviour into account.
• 9:09
  SPEAKER_00: Now I will say that it is great to use it as the base of your strategy.
• 9:13
  SPEAKER_00: In fact, you can combine this with any other pricing method to make sure that your prices do not go below your costs, and then you can continue to make a profit.
• 9:23
  SPEAKER_00: As long as you remember to include all those costs though.
• 9:26
  SPEAKER_00: Next time we're going to be looking at competitor-based pricing, so tune in then to see how your pricing can be impacted by your competitors and their pricing and how you should react.
• 9:37
  SPEAKER_00: If you've enjoyed this podcast, please do share it with friends and colleagues and visit us at enhance.training to find more articles, podcasts, and videos on many aspects of pricing, business management, and personal performance.
• 9:52
  SPEAKER_00: I hope you've enjoyed listening, and I look forward to speaking to you again soon.