Cost plus pricing lets you choose if you want to charge more or less than your competition. Here are two things to think about as you analyze the competition:
If you charge less than your competition, can you still cover your production costs while making your business profitable? This is at the heart of a cost leadership strategy, which focuses on becoming the lowest-cost producer of a service or product within a specific industry or market. It’s worked well for big box retailers, whose strategy keeps their profit margins razor-thin for vendors. They can make up for small profit margins by selling in bulk. With that in mind, it may not be the best choice for a small business.
If you believe you have the market cornered, can you charge more than competitors? Cornering the market means you have achieved a dominant market share. Because your competition is limited, you can charge more, provided demand is still high. This is common practice with luxury brands or trending products (like those big insulated mugs everyone seems to be after).
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Alternative pricing strategies
If the considerations above are giving you pause, here are some alternative pricing strategies to evaluate:
1. Value-based pricing: This strategy focuses on the perceived america phone number list value of your product or service rather than just production costs. For example, a streaming service offers personalized subscription tiers based on viewing habits, giving frequent movie watchers a better price per film.
2. Penetration pricing: The strategy sets a low initial price to quickly gain market share and brand awareness. For example, an airline lures first-time flyers with $99 one-way deals.
3. Dynamic pricing: This approach adjusts prices based on real-time factors like demand, inventory levels, and competitor actions, like when rideshare apps use surge prices during peak hours and high-demand times of the year.
4. Freemium pricing: Offers a free basic version of your product or service while charging for premium features or functionality. For instance, an SEO platform might offer a free version with limited searches and keyword insights. Once you upgrade, you get a more detailed view of keyword performance, along with recommendations for how to rank.
5. MSRP (manufacturer-suggested retail price): This is the price the manufacturer of the product suggests you use. MSRP is most often seen in the automobile industry and high-end, luxury goods. The manufacturer determines the production cost and average desired profit margins for the seller, manufacturer, and supplier.
A formula for determining if the price is right
Pricing models are varied and complex and require significant consideration. After all, the model you choose can make or break the future of your business. If you want something simple — at least to start — cost plus pricing is worth considering. It’s a strategy that focuses on production costs while taking your desired profit margin into account. While not ideal for every industry, this simple formula might give you the selling oomph you need to grow.