The Hidden Dangers of Cost+ Pricing
Various market and macroeconomic pressures have caused many manufacturers and distributors to struggle with profitability and re-evaluate their pricing strategies.
Despite the appeal of its simplicity, Cost+ pricing has inherent hidden risks, such as ignoring market dynamics and value perception. Over time, these risks have led to a shift toward modern, data-driven pricing.
To demonstrate just how easy it is for Cost+ to undermine profitability and market position, here are a few brief – but very real – examples.
Cases in point
Giving back earned gain
A building products distributor platform grew aggressively through add-on acquisitions. However, their Cost+ pricing strategy backfired.
Lower COGS meant lower prices, unintentionally giving savings to customers with an unchanged willingness to pay, leaving money on the table.
Falling behind market dynamics
A regional paper products manufacturer’s competition invested in new technologies that lowered costs, allowing them to win customers at lower prices.
By applying aspirational margin targets to a high-cost base, the company dropped from #1 to #3 in their market, losing valuable market share due to Cost+ pricing.
Ignoring value perception
An industrial parts manufacturer faced stagnant growth as its Cost+ pricing treated all customers equally, disregarding customer willingness to pay.
The price for a given product was too high for some customers, resulting in lost sales, and below what other customers were willing to pay, resulting in money being left on the table. The one-size-fits-all nature of Cost+ pricing led directly to substantial revenue and profit woes.
Misguided pricing during volatility
A packaging manufacturer's Cost+ pricing strategy seemed effective during inflationary times, only if they could process updates quickly.
But when containerboard prices fell, they had a big decision to make about how much of the difference to give back. Customers were expecting price decreases, but management didn't want to lose all the gain – leaving them in an unenviable position due to rigid Cost+ pricing.
Re-pricing delays zap profit
An electrical components distributor faced profit erosion due to infrequent Cost+ price updates.
Despite frequent supplier cost increases, costs were updated monthly in their ERP system followed by a manual Cost+ price update. The lag from supplier cost change to getting a price update published was costing the distributor more and more profit every time there was an update.
What’s next
Cost+ pricing pitfalls in B2B markets are more pronounced than ever. While it appears straightforward on the surface, the risks Cost+ pricing carries far outweigh the perceived simplicity.
These are only a few examples across industries that highlight the need for a modern, data-driven approach to pricing – which is what our team helps businesses just like yours with every day.
Ready to talk to an industry pricing expert about the impact Cost+ alternatives could have on your business? Find a time that works for you to book a brief intro chat with our team.
