Value pricing, not cost-plus

November 21, 2017

Value pricing, not cost-plus

If you ask companies how they set their prices, chances are they will say value pricing! But if you take a closer look, cost-plus pricing is really what they are using: Add your target margin to costs and you have a price. In true value pricing, the mark-up depends on how much the customer values the product. This value differs hugely, but it’s almost always measurable, which is why value pricing has such enormous profit potential. For example, a metallic finish on a car comes with a high mark-up despite minimal manufacturing costs. In the US, a stamp for a two ounce letter (57g) costs 45 percent more than a stamp for a one ounce letter (28g), although the costs are nearly the same. It’s all a question of value. But measuring customer value is borderline impossible when there is a high number of products, e.g. thousands of spare parts. That’s when you need a system. Spare parts, for instance, should be grouped by various criteria such as safety relevance – their price is then higher or lower depending on the group they are in. So true value pricing is actually always possible.

Advice of Simon-Kucher experts:

Analyze the current margins of your products: Minor deviations are a clear sign that you are using a cost-plus approach. Ensure that true value pricing is used, even if it’s a lot of work.