In fluctuating economic times, getting pricing right becomes that much more challenging. Demand may wane, and your costs will be less stable.
Although the cost-plus model itself is straightforward, you’ll want to make adjustments to it to maximize revenue when economic conditions are up in the air.
Here are the 7 most important considerations when using cost-plus pricing strategies during uncertain economic times.
Consideration 1: Your Costs Aren’t Right
Particularly in larger companies, different pricing methods are used; sometimes, allocation methods aren’t aligned. Or, there could be a lack of discipline in getting your pricing strategies as precise as possible.
Either way, when prices are as variable as they are during economic uncertainty, you must evaluate your strategy consistently. Be prepared to make changes immediately to avoid giving away margins.
Consideration 2: Costs Are Going Down
Are manufacturers, suppliers, shippers, or other parties involved in getting your product to market cutting their prices? If so, your costs are going down. If your cost-plus markup remains stable, the price of your good or service must also decrease with costs.
However, there’s likely a floor price where you would stop dropping prices, so determine that.
Consideration 3: You’re Pricing Based on Outdated Standards
Since the cost-plus pricing strategy requires you to base prices on operating costs, you’ll want to ensure those cost estimates are still accurate. This is particularly true if you’re pricing based on general estimates and not precise data.
If you review the numbers and realize your standards are outdated, it’s time to update that database and adjust prices accordingly.
You may also conclude that costs are too volatile to change your prices significantly. In this case, keep your pulse on costs and adjust slowly.
Consideration 4: Formula-Based Pricing Isn’t Painting the Whole Picture
Cost-plus pricing is an easy strategy, but it comes with some pitfalls. Although your model should adjust prices appropriately – assuming you’ve automated it – based on cost adjustments, there are some variables it can’t account for.
For instance, did you include floor and ceiling prices? What about exit clauses? And what happens if prices become negative, as with oil recently?
Think through these scenarios carefully, and go beyond – or adjust – the model as needed.
Consideration 5: Your Costs Can’t Adjust Dynamically
Especially during recessions or uncertain economic times, the factors that affect your margins change dynamically. Sure, prices may go down, but that may also vary in all directions, at different times, and by different percentages.
Whatever pricing method you use, ensure it can adjust dynamically. Combine that with value-based pricing to set more accurate prices that maximize profit. Consider using pricing software in conjunction with your models.
Consideration 6: Sellers Might Be Giving Away True Margins
One frequent sales tactic is to give uncertain prospects your product or service “at cost.” Lure them in, then adjust prices later, right?
Although a viable sales tactic, some prospects may be doing this to determine your margins and ask for discounts accordingly. Ensure your sales team is aware of this and doesn’t give away your most coveted pricing information.
Consideration 7: Your Products Include Intangible Products
Certain products, such as software and data, are ultra-low-cost to produce but offer incredible value. In these cases, cost-plus pricing won’t tell the whole story, and you’ll want to use value-based pricing.
Be in touch with the value any software, apps, data, and similar services offer, and price appropriately. Your exact approach can differ, so you should leave it up to your trained experts.
Leave It to the Experts
Even in the most stable of economies, pricing is incredibly complex. Now more than ever, you want to leave pricing strategy up to the people who know it best. Their years of experience and dedicated efforts mean you’ll maximize profits across the board.
Since pricing is a relatively new field, finding experienced talent can be difficult. Jennings Executive specializes in recruiting for senior-level pricing strategy roles. Let us help you find the best pricing experts for your company. Learn more today!
Related: What is an Executive Search Firm? Here’s Everything You Need to Know
