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    Disadvantages of Cost Plus Pricing and Summary

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    LJBernardo
    Cost plus pricing is an inefficient pricing strategy that provides little incentive for reducing costs or increasing profits. It encourages businesses to be isolated from competitors and customers, ignoring what customers are willing to pay. As a result, cost plus pricing can lead to wasted resources, declining demand, and lost profits over time as the market changes. The strategy disregards customer value and perceived worth of products. While suitable for some uniform-cost businesses, cost plus pricing is generally not recommended and should be avoided by most companies, especially those in software.

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    Disadvantages of Cost Plus Pricing and Summary

    Uploaded by

    LJBernardo
    73 views2 pages
    Cost plus pricing is an inefficient pricing strategy that provides little incentive for reducing costs or increasing profits. It encourages businesses to be isolated from competitors and customers, ignoring what customers are willing to pay. As a result, cost plus pricing can lead to wasted resources, declining demand, and lost profits over time as the market changes. The strategy disregards customer value and perceived worth of products. While suitable for some uniform-cost businesses, cost plus pricing is generally not recommended and should be avoided by most companies, especially those in software.

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    Cost plus pricing is an inefficient pricing strategy that provides little incentive for reducing costs or increasing profits. It encourages businesses to be isolated from competitors and customers, ignoring what customers are willing to pay. As a result, cost plus pricing can lead to wasted resources, declining demand, and lost profits over time as the market changes. The strategy disregards customer value and perceived worth of products. While suitable for some uniform-cost businesses, cost plus pricing is generally not recommended and should be avoided by most companies, especially those in software.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    73 views2 pages

    Disadvantages of Cost Plus Pricing and Summary

    Uploaded by

    LJBernardo
    Cost plus pricing is an inefficient pricing strategy that provides little incentive for reducing costs or increasing profits. It encourages businesses to be isolated from competitors and customers, ignoring what customers are willing to pay. As a result, cost plus pricing can lead to wasted resources, declining demand, and lost profits over time as the market changes. The strategy disregards customer value and perceived worth of products. While suitable for some uniform-cost businesses, cost plus pricing is generally not recommended and should be avoided by most companies, especially those in software.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Disadvantages of cost plus pricing

    1. It's horribly inefficient.


    The guarantee of a target rate of return creates little incentive for cutting cost or for increasing

    profitability through price differentiation. Stakeholders easily become passive towards pricing,

    facilitating laziness and an atrophy of profits as the market and customer continues to change.

    Just for some perspective, the government uses this strategy of guaranteed profit margins on

    costs to make contracts with private businesses “easier.”  The result is an incentive to maximize

    costs, which wastes billions of dollars and results in shoddy workmanship.

    2. It creates a culture of profit losing isolationism.


    This inward facing approach discourages market research. Although watching competitor

    prices isn’t the end all, be all of pricing, it is pretty important. You should be aware of how much

    a competing good costs because it can affect your own marketing and pricing strategies. Plus

    with no research, you have little to no data on your customer's perceived value of the product

    (more in the last point). 

    3. It doesn’t take into account consumers.


    Perhaps the biggest downfall of cost plus pricing is that it completely disregards the customer’s

    willingness to pay. To make money, a customer must be involved. They’re the most important

    part of selling anything, so any pricing strategy that doesn’t take customer value into account is

    creating a vacuum that’s sucking all of the profit out of the business.

    Furthermore, to be blunt, customers don't care about how much something cost you to make.

    They understand there are costs associated with doing business, but consumers care more about

    how much value you’re providing. For example, making a bottle of Rogaine may cost $3, $10, or

    $50, but consumers only weigh price against the value of a husband with hair on his head, which

    depending on the customer could be 2x, 10x, or 100x the cost depending on follicle
    effectiveness. Simply barreling ahead with a desired rate of return can result in declining demand

    that is disregarded until substantial losses occur. Even if consumers are buying your product,

    there could still be a better price for revenue optimization and price differentiation.

    Summary: Very few companies should use cost plus pricing 


    To summarize, cost plus pricing isn’t ideal for most businesses, unless you truly cannot spend

    some extra time on the most important aspect of your business, which sometimes happens when

    you’re bogged down by fulfilling orders or the sheer number of items you’re offering customers.

    Additionally, some businesses have very uniform costs surrounding their offerings that are the

    same for all competitors. In this case, margins will probably be uniform, as well, which means

    the pricing methodology should be more competitive (tomorrow’s post) or market based

    (Thursday’s post). No software or SaaS company should use cost plus pricing, because the value

    you’re providing is traditionally much more than your cost of doing business.

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