While cost-based pricing has matured from the Dark Ages of calculating costs with rules and old machines, and then writing them in a book, there’s still a great deal of evil in it.

… Gimme SCIENCE!

To avoid margin erosion, companies are shifting from cost-based to value-based pricing strategies that weave intuitive pricing knowledge and pricing analytics into a customer-centric value engine.

IndustryWeek recently published a chart showing the 5 stages of cost-based pricing maturity.

The stages evolve from static, unintentional cost-based pricing where nothing is formalized and there’s much fragmentation across functions to advanced cost-plus pricing, where analytics make their entree, but still miss the mark.

• Are you still using cost-plus pricing?
• If so, where do you stand on the curve?
• Are you aware of the negative impact of cost-plus pricing on your business?

The Problem with Cost-Plus Pricing

Cost-based or “cost-plus” pricing results in a very high potential for margin erosion and fragmentation across various functions, especially when costs decline and Sales is put in charge of managing price changes. Related read: What is Cost-Plus Pricing and Why Are You Dumb to Rely on it?

Pricing analytics are digging their roots deeper into our everyday. As such, companies have been able to shift from making decisions based solely on costs toward actively finding pockets of price improvements in unsuspecting places. Driven by customer value.

The payoff? Pricing consultants often estimate a 5% to 8% increase in margins within the first 2 years of a large value-based pricing project.

Can you get a faster payoff with cost-based pricing? Yeah. Immediate gratification. But that’s no longer the sustainable choice for today’s complex, dynamic, customer-driven market.

Customer Value in the Driver Seat

Value-based pricing initiatives do require a dedicated budget, which may be tough in today’s turbulent environment. But in the long run, value-based pricing is far more effective at extracting value from your markets because it drills deep into layers of customer value, including low-hanging fruit and customer willingness to pay.

A value-based pricing approach also reduces competitive risk by running fast, frequent analysis on prices (traditional and online) and price elasticity across all channels and locations. And allows you to quickly make changes to fix under/overpriced products and reduce the risk of lost sales.

Now is the time to inject more customer-value thinking into the discussion especially with differentiated products and services. A value-based pricing solution will help you find areas of strong differentiation in your product range and help teams optimize pricing there.

Read more about value-based pricing solutions: