Skip to comments.Why cost-based pricing sucks
Posted on 01/18/2014 2:24:50 PM PST by rickmichaels
Cost based pricing is relatively simple; you figure out your cost of goods, set a desired margin for each unit, add that margin onto your costs and you have your price. Cost based pricing doesnt require the detailed level of analysis and value measurement necessary to employ a value-based pricing strategy. Because its simple, many companies fall into a trap of cost-based pricing. But as far as smart pricing goes, cost-based pricing strategies are anything but. So if its simple, why does it suck? Here are three reasons why:
(Excerpt) Read more at business.financialpost.com ...
Sounds like a rationalization right out of “Atlas Shrugged”.
It’s not pricing that matters. It’s what people are willing to pay that matters. An entirely different calculation.
The politicians and groups that support cost-based pricing think people are too stupid to make a value decision without the governments help.
Just more suppression and/or control of capitalism.
The author was never a product manager.
Every product I sell is set at a minimum cost plus price for that particular segment or type of product...
A item that needs special consideration in the sell price like being keep frozen automatically is set at a higher margin to off set the cost of keeping it frozen...
The biggest factor in pricing a product is what the COMPETITION IS SELLING IT FOR...
I have many items as an example in my dry goods category that is priced at what the market will bear because there are few competitors that sell it... typically it will only be a few margin points higher than normal...
An item or similar item 50 other companies sell will be priced accordingly...
Is the min-max method out of date or too advanced?
I never heard of any of these pricing strategies- except for cost-based which is used for utilities.
Cost based pricing does not work in the government. They overtax the systems and the more money they take in the more they waste.
No respectable publication would use “sucks” in the title
They just won’t leave it alone. Poverty and low growth all come from government interference in the marketplace.
I like to buy things below the marginal costs and let the manufacturer make a profit on volume.
Maximizing profit would indicate selling to everyone at their individual price on the demand curve (limited by marginal costs on the low end).
I’d like to only purchase the gov’t services I want.
Why should they be government services?
Well it kind of depends on what you sell. Luxury designer goods are usually value priced rather than cost priced.
It also depends on how many competitors you have and whether the product is unique and exclusive.
Value pricing attracts competition because they will quickly realize that the cost is low and the profit margin high and they will rather quickly undercut your pricing PDQ and the resulting price war result in a downward spiral to cost pricing.
Sometimes, keeping your value pricing modest will delay the entry of competitors into your market, because there might be other value priced products that have more tempting margins.
There is no one best system for everything.
Interestingly enough, the Government seems to use a “Cost-based” taxing model. With absolutely no controls on cost.
That would involve keeping the prices secret from other buyers. The free market requires instant, open and public pricing info.
Which is why advertisers and politicians spend so much time obscuring the facts.
Oh, pray tell why is it any sort of "rationalization".
And then, if you have the time, please let us know how Ayn Rand figures into it.
I’m sure Dingy has the Senator price list in his pocket.