Magazine article Management Today

Don't You Believe It ... Costs Are the Best Basis for Pricing

Magazine article Management Today

Don't You Believe It ... Costs Are the Best Basis for Pricing

Article excerpt

If there's a business faux pas that makes me queasy, it's this one. Cost-plus pricing is widespread, but so many things are wrong with it that it's going to be hard fitting them all into this space. But here goes ...

Cost-plus ignores the value of knowledge. If your business has a future in the UK, it's a knowledge business. You aren't just selling stuff - you're selling the result of know-how, technical expertise, research and development, marketing and branding. Would you expect to buy Microsoft Office for pounds 2, the cost of the CD and the box? Of course not. The value is in the code, not the physical manifestation.

It leads you into the commodity trap. Set your prices as cost-plus and you commit to compete just on price. If you price based on value to the customer, however, you commit to deliver a distinctive offering that your customers appreciate and will happily pay more for. Which would you rather spend your days doing? …

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