Cost-plus pricing has been a cornerstone of business strategy for decades. It’s simple: calculate the total cost of making a product, add a markup, and get your price. On the surface, it seems like a no-fail approach — every sale guarantees your costs are covered, and you pocket a profit.
But simplicity doesn’t always mean success. In today’s fast-paced ecommerce world, cost-plus pricing often leaves money on the table. It overlooks customer value, ignores market dynamics, and fails to adapt to changing demands.
Here’s why cost-plus pricing could limit your business — and how shifting your strategy can unlock greater profitability.
What is cost-plus pricing?
Cost-plus pricing is exactly what it sounds like — pricing based on costs. You add up production, labor, and other expenses, then tack on a set margin. For instance:
- Cost of production: £50
- Desired markup: 20%
- Final price: £60
It’s attractive because it:
– Guarantees a profit margin on every sale.
– Justifies price increases when costs rise.
– Treats all customers equally with consistent pricing.
– Simplifies decisions, saving time and effort.
But while it’s easy to implement, this pricing strategy is blind to customer behavior, competitive actions, and opportunities to capture more value.
Six reasons why cost-plus pricing falls short
- It stifles price segmentation
Not all customers value your product the same way. If you apply a blanket approach, you cannot tailor prices for different customer groups. High-value customers may have been willing to pay more — but you’ll never know because you didn’t ask. - It ignores what customers care about
Customers don’t care about your costs. They value how your product improves their lives or solves their problems. Pricing based on costs misses this key driver, potentially alienating customers who expect value-based pricing. - It undervalues premium offerings
Let’s say you sell a tire that lasts twice as long as the competition. If your costs only justify a 10% price increase, you’re locked you into a figure that doesn’t reflect the true value to the customer. The result? You’re leaving money on the table. - It overlooks competitor pricing
Pricing isn’t just about your costs — it’s about the market. Competitors may price lower, threatening your market share, or higher, giving you room to increase margins. Cost-plus pricing doesn’t account for these dynamics, leaving you disconnected from the competitive landscape. - It can lead to price missteps
When demand is high, pricing based on cost alone might undervalue your product. When demand drops, it can overprice it. This rigidity can cause you to lose sales or sacrifice profits when flexible pricing could have kept you competitive. - It lacks agility
Ecommerce thrives on adaptability. Static pricing doesn’t account for real-time shifts in demand, supply chain changes, or customer trends. Dynamic pricing tools, on the other hand, adjust automatically, ensuring you’re always aligned with market conditions.
How to move beyond static pricing
Switching from cost-plus pricing doesn’t mean throwing out everything you know. It’s about adding flexibility and aligning your strategy with customer value.
Here’s where to start:
Identify high-value customers: Which segments are willing to pay more? Use data to set premium prices where it makes sense.
Experiment with price tiers: Create basic, standard, and premium versions of your products. Test different markups on premium options to see what resonates.
Leverage dynamic pricing tools: Platforms like Intelis AI use real-time data to optimize prices based on market demand, competitor actions, and customer willingness to pay.
Final thoughts on cost plus pricing
Cost-plus pricing might feel like a safe, straightforward approach, but in a competitive ecommerce market, it’s not enough. It ignores customer behavior, competitor dynamics, and the value your product truly delivers.
By transitioning to a value-based or dynamic pricing strategy, you can unlock new opportunities for growth, boost profitability, and meet your customers where they are.
Ready to leave outdated pricing models behind? Learn how Intelis AI can help you implement smarter, data-driven pricing strategies that reflect your product’s true worth.
