Do you use this terrible pricing strategy?

Cost-plus pricing is where you calculate your costs, then add a percentage to it for profits. It is used by most companies.

Cost-plus pricing is required only where you sell customized products/services — where every order is different. For all other products/services — it’s the worst pricing strategy you can use.

In fact — you can lose money using this strategy! How? Two ways:

  1. Your “fixed” costs are not really fixed. Your component costs can rise dramatically if your unit sales estimates are off (which happens all the time with new products).
  2. It takes no account of what customers are willing to pay. You could spend years getting 15% profit on a $18-priced product where customers would have been equally happy to pay $19.99. That $2 of extra profit per unit sold might be needed to save your company when the next financial downturn hits.

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