Cost-plus pricing is a common approach to pricing used by many B2B businesses.
It's simple really - in order to reach your cost-plus price you figure out all the costs of production or manufacture, set a desired margin for each unit and add that margin onto your cost.
Hey presto, you have your price!
It ensures a reasonable margin. By using the same markup on all products, you know that you are getting a specified margin.
If you know your competitions’ standard markup you can always price appropriately.
It’s fair. Every customer is charged the same price so there is no price discrimination whether the customer is rich or poor.
Although it might seem a logical strategy at first, cost-plus pricing is a bad move for your business.
It's also bad for your customers because they don’t want to buy just anything regardless of the price.
What they are willing to do is invest — they’re willing to invest in anything they feel will create real value for them – and if you create value for your customers they see more in what you have to offer and will either pay more for each product or buy in greater volume.
Cost-plus pricing is also not acceptable for determining the price of a product to be sold in a competitive market, primarily because it does not factor in the prices charged by competitors.
Thus, this method is likely to result in a seriously overpriced product. Further, prices should be set based on what the market is willing to pay - which could result in a substantially different margin than the standard margin typically assigned using this pricing method.
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