Pricing your products properly is always a challenge, but the cost-plus model has consistently been able to bring in reliable profits. Or at least it was.
Author Nick Saraev
Photo: Freepik
As the market becomes more interconnected and dynamic, sticking with a simple cost-plus methodology leaves you vulnerable to the competition. Alex Morbe, the CEO of MARKT-PILOT recently shared how you can bring your company into the future with market-based pricing.
Understanding Cost-Plus
The traditional definition of cost-plus pricing is well known. If your company hopes to make a certain profit margin, it will simply add a fixed amount or percentage to the base cost of a product or service.
This can be based on the value you’re providing, but at its core, it requires the cost and a set markup. For example, if you’re selling a specific motor that costs 300€ to make, you might add a predetermined 113% to sell it for 640€.
The biggest challenge with this method is that it leaves your team entirely in the dark about what the competition is doing. It sets the price of your products without any research or understanding about the market landscape, or what your clients will see from other manufacturers.
If you stay dedicated to a traditional cost-plus model in a dynamic market, you’re stuck
- Without Market Orientation
- Ignoring Customer Perception and Value
- Limiting Premium Pricing Opportunities
- Overemphasising Internal Costs and Stakeholders
- Reacting Instead Of Being Proactive
This is an excellent approach if you don’t have any market data, but it will allow the competition to get ahead in an interconnected marketplace.
The Power of Market-Based Pricing
Rather than relying on this limited pricing model, using data collected about your competitors’ pricing allows you to set a price that makes sense in context. Market-based pricing relies on activating real-time market analytics to make more informed pricing decisions.
Taking a more data-driven approach leads to
- Less Complaints About Pricing
- SustainableLong-Term Revenue Growth
- Prices That Mirror Market Dynamics
If we return to our previous example, the motor you’re selling for 640€ may be sold by your competitors for anywhere from 790€ to 830€. You would be losing potential profit by skipping market research. A more appropriate price might be 810€.
By shifting to this style of pricing you can boost revenue and profit, as well as customer satisfaction. If your clients shop around, they’ll see that your prices are fair and in line with the market value which will instill confidence in your brand.
Implementing Market-Based Pricing
MARKT-PILOT has worked with countless brands to bring their pricing model into the modern age. They have the process down to a science.
Step One: Taking Stock
The first thing MARKT-PILOT does is a screen of their clients’ entire parts portfolio. They focus on the off-the-shelf parts because those are the ones that will have market data available. The results are usually consistent.
- 21% of parts will be underpriced
- 22.3% of parts will be overpriced
- 4.1% of parts will be priced competitively
- 51.9% of parts are exclusive
Once you flag these specific parts, you can find opportunities for revenue growth across the board.
Step Two: Data Collection
To make data-driven pricing decisions, you need to collect information about your competitor’s pricing. This can be difficult when they utilize dynamic pricing of their own.
MARKT-PRO mirrors the end customers’ process to gather up-to-date pricing statistics that you can act on. They flag any discrepancies in pricing and show you how off-base your estimates have been.
Step Three: Insights
With data in hand, you can start making some changes to your pricing model. There are two subsets of pricing discrepancies that you will have to deal with. To break them down, let’s return to our motor example.
Underpriced Items
Let’s say you sold the motor at 640€ and were able to consistently sell 100 units a month. That’s roughly 34,000€ in profit. By increasing your price to a more competitive 810€, you can instantly boost that profit to 51,000€.
You’ve managed to skyrocket your return without changing anything but the price. What’s more, you’ll be able to retain your market share because customers will see that your prices are on par with your competitors.
Overpriced Items
On the other hand, if you were originally selling the same motor for 10,000€ there are two potential outcomes.
If you have consistently been selling 100 units at this heightened price, nothing is stopping you from continuing to charge it. Your clients believe it to be fair, and you’re getting extra profit.
However, if you’ve only been able to move 10 units, you now have a clear reason why. By bringing your prices down to reflect the market, you’ll be able to increase your market share and improve your profits.
Step Four: Execution
This level of data won’t only allow you to implement dynamic pricing, but also to get a read on your competitors. You can pinpoint other companies that have large catalogs, far reaches, and consistently lower prices. Knowing where you land in comparison to the competition allows you to actively stand against them and gain back market share.
Market-Based Dealer Pricing
Within the B2B market, the parameters for market-based pricing become more complex. When you work with dealerships, there are two major questions you must answer.
1. Is your list price in line with the market?
Once you understand how your pricing lines up with the market at large, you can work with your dealers to define the perfect positioning.
2. Are you charging your dealers enough?
If your prices don’t match up with the market value, there’s always the possibility that your dealers have been picking up the slack and walking away with extra profit.
Only once you have all the information will you be able to find a fair margin distribution for both you and the dealers. When you bring the data into negotiations, you’ll be able to convince them to stick to your listing prices.
In Conclusion
A dynamic market requires dynamic solutions to stay ahead of the curve. If you want to keep a competitive edge, you need to turn your eyes to the market itself.
Dynamic pricing takes time, dedication, and a constant stream of data. However, only by implementing it effectively will you be able to sustainably stay on top.
