Why ‘Cost Plus Pricing’ is passé

Most of us here learn pricing strategy in business economics 101 from a cost plus angle. I want to sell this killer mouse trap Mr.Venture Capitalist/Loan Officer : It costs X dollars/rupees/pounds to make. I will add a y% margin and sell it. Voila!

That strategy died sometime in 2002.

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Unless you are a pioneer in your niche, you are forever the slave to the guy who is the best in the business. And eventually it’s a race to the bottom. Unless you are Amazon. If I made a mousetrap in Boston/Birmingham/Bombay, in 1930 my pricing was competing and dependent on the pricing of that other mousetrap maker across town. Since I invented the damn thing and priced it at 100 shekel, the other guys have to use this as a base price when deciding to price their mouse traps.

In 1980, after industry deregulation, my pricing was competing and dependent on the pricing of mouse trap makers all across my country. Today, after deregulation and cheap container shipping costs became de riguer, my pricing is competing and dependent on the pricing of that bloody efficient mouse trap maker in Guangzhou (or that coding guy in Bangalore). And my sourcing costs does not stand a chance versus his.

Innovation and being a pioneer in serving a niche is the way forward as the world integrates even more tightly and your better dump this cost+ mentality quick and embrace a true innovater mentality.

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One thought on “Why ‘Cost Plus Pricing’ is passé

  1. Great inputs Shiva. This is a very well chronicled summary of how business transformed over the years. From an SCM & Logistics perspective this is how global trade is. Pharma, Heavy Engineering, High-Tech, Electronics, Auto, Legal, CS – everything is global. Efficient markets!

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