Cost-Plus vs. Value-Based Pricing

Setting the right price can MAKE or BREAK your business. In this extremely tough and competitive environment, you cannot afford to get price setting wrong.

Many companies use the cost-plus approach to pricing where a fixed percentage (mark-up) is added to the product cost per unit.

There are pros and cons to this approach. It is a straightforward calculation and information required is readily available. BUT it is internally focused on your business and has nothing to do with customer value.

Value-based pricing, whilst requiring more effort and resource enables you to focus on customer value. Cross-functional collaboration is required to understand, create and communicate value whilst capturing a share of this value in your price.

It is not enough just to know your costs and set your prices, you need to understand customer value within the constraints of your competitive landscape, company costs and internal capabilities. Value-based pricing builds a foundation for long-term profitable growth.

How do you set your prices?