Cost-plus versus value-based pricing
The pros and cons of setting prices linked to costs or pegging prices against the benefits you offer customers.
There are two basic methods of pricing your products and services: cost-plus and value-based pricing. The best choice depends on your type of business, what influences your customers to buy and the nature of your competition.
Cost-plus pricing
This takes the cost of producing your product or service and adds an amount that you need to make a profit. This is usually expressed as a percentage of the cost.
It is generally more suited to businesses that deal with large volumes or which operate in markets dominated by competition on price.
But cost-plus pricing ignores your image and market positioning. And hidden costs are easily forgotten, so your true profit per sale is often lower than you realise.
Value-based pricing
This focuses on the price you believe customers are willing to pay, based on the benefits your business offers them.
Value-based pricing depends on the strength of the benefits you can prove you offer to customers.
If you have clearly-defined benefits that give you an advantage over your competitors, you can charge according to the value you offer customers. While this approach can prove very profitable, it can alienate potential customers who are driven only by price.
Pricing services
When you put a value on your services, rather than working from a unit price, you will need to think carefully about the value of your expertise and other desirable aspects of your service, such as a fast response time or out-of-hours service.
For example, an IT technician who can resolve a problem in two hours will be worth more to the customer than one who takes two days. They would be able to charge more for their service, despite it taking fewer man hours.
Carrying out market research and looking at your competitors will help you to understand the level of service customers expect at your price point.