Why have you chosen cost-plus pricing? You may have good reasons, but this single descision could be holding you back.
Bold words maybe, but pricing is a powerful profit lever in the B2B toolbox. Use it well and your margins will grow; follow the herd and you can limit your growth. All too often I see B2B companies choosing the cost-plus model for fear of competition, or believing the market is controlling the price.
Business offerings vary of course – you may provide cloud-based services, business consulting or sell medical swabs. But while the product is different, the concept’s the same: to maximise your margins, you must think value, not cost.
Extreme value leads to extreme profits
How much would you pay, for example, for eating a meal? $20, $200..? How about $2000 per plate?
Ibiza-based concept restaurant Sublimotion charges this price. Their 20-serving taster menu by Spanish Michelin Star chef Paco Roncerobiza is enhanced by projections and musical compositions for an ever-changing sensory experience. Despite – or because of – the astounding price tag, there’s no doubt that this dining experience will be one of a kind.
How you’d spend $2000 doesn’t matter. The point is that someone will pay, because of the irresistible value of what is being sold. Twelve lucky diners will feel privileged to pay for their place.
When prices reach this level, you could not believe that they’re driven by cost. This is Value, and it works.
The market doesn’t set the boundaries – your pricing model does
Logic says that raising your prices will exclude buyers, but cost-plus pricing loses customers, too. Except that when you limit your value by driving costs down, you’re rejecting the customers who would gladly pay more.
Value propositions drive prices so often that we hardly notice anymore. If Oracle strikes a multi-million dollar software license deal, that’s not what it costs – the costs for additional licences are virtually none – but nobody questions its worth.
B2B companies have far more pricing flexibility than they believe. If you let the market dictate what you charge, you’re missing a major opportunity. To charge market rate suggests that your service is the same as the rest (after all, how else are comparisons made?) Value-based pricing, on the other hand, highlights what sets you apart.
This not only makes your business more rewarding – cost-cutting exercises gnaw away at the soul – but creates room for movement and opportunities for growth.
Almost without exception, cost-plus pricing leaves money on the table that could have been yours.