Cost Plus Pricing Explained
Cost Plus Pricing is a basic repricing strategy and dynamic pricing formula used by businesses to cover costs and ensure a healthy cash flow. Cost plus pricing covers all outgoing expenditures from production costs to sales related costs. This method pretty much guarantees profits while still remaining competitive. Thankfully, the price optimisation formula used for cost plus repricing is really very simple, with little information required.
Cost Plus Pricing Formula
Basically, for dynamic price updating using the cost plus pricing method, you simply need to follow three simple steps:
- Work out your total costs involved for each individual product. This includes everything from production costs, fuel costs, marketing expenditures, packaging costs, marketing costs, staff salaries and raw materials. One you know your total expenditure on a batch of products, you can then divide this amount by the number of units. This gives your unit cost. (Total Costs / Number of Products = Unit Cost)
- Decide on your desired profit margin amount. This amount varies from business to business, but is usually around a 40% to 70% markup. Typically, you might want to reprice your products to allow wholesale customers a lower price with a 40% profit margin, and retail customers a higher price with a 70% profit margin to cover costs. Or, you may want to use our automatic price updating service to adjust your profit margin accordingly depending on competition prices. This is also know as percentage allocation.
- Optimise the price of your final product. Basically, you just need to take your unit cost value and add on your desired percentage allocation from step 1 and 2. For example, if the total costs per toaster that you sell is $10 and your profit margin is 50%, you will need to reprice your end product at $15. (Unit Cost + Profit Margin %)
Increasing sales with free shipping
Let’s face it: Customers love free stuff. If you’re looking to increase sales online, offering free shipping is a great way to attract customers to spend more and abandon their shopping carts less. Free shipping takes away the guilt of shoppers wasting their money on delivery when they could just as easily go out and buy the same product from a high street shop themselves – for free.
Losing profit on free shipping
However, from a business point of view, sometimes free shipping can be costly and – despite increasing sales volume online – is it always worth the loss in revenue? Well, if you have a very small profit margin, then free shipping may not be the best of options. On this note, offering free profit only increases sales on a case by case basis, i.e. when the product is expensive and delivery costs low.
Small items such as books, software, video games and CDs can be shipped very cheaply, and so offering free delivery on these sorts of products is a great way to make more sales without losing too much revenue. Free shipping may also be a great way of one-upping your competitors if they don’t offer it. Either way, if you’re unsure about the impact of offering free shipping on your business, then it doesn’t hurt to make a temporary trial of it – Advertise exclusive free shipping for a limited time and see how your profits and online sales fair.
How to increase sales online
- When increasing sales for online businesses with low profit margins, you need to be a little stingier with free shipping offers. Increasing your sales online in this instance, does not necessarily mean it’s going to be good for your revenue. The best way to tackle free shipping in this case, is to only offer it on a minimum order value, a value that will make the cost to you economically worthwhile. This method in itself can sometimes be a good way of increasing sales and tempting customers into spending more to save on shipping.
- When increasing sales for online businesses with high profit margins, free shipping is usually a highly feasible tactic that you should definitely take advantage of. Unless the product you sell is extremely heavy and costly to ship, the slight profit loss in postage is a small cost compared to the great savings customers will see themselves making. Free shipping has proven to reduce shopping cart abandonment markedly and increase online sales much more.
- When increasing sales for online businesses that sell rare and in-demand items, you can afford to be a little greedier in your tactics. With little competition to contend with, you can easily get away with increasing your prices to cover your losses on free shipping. This way, sales will increase as customers are enticed by the free shipping without knowing that the delivery cost is actually hidden in the product price.
Value-based repricing explained
Value based repricing is a pricing method formulated depending on how much an end product is worth to customers. This is based on the sheer value and worth of the end product to customers as opposed to to the costs involved. Obviously, this price optimisation method will only be feasible for certain types of business. Ultimately, the business will be able to sell their product with significantly increased profit than if they used a standard cost plus pricing method.
When do we use value based repricing?
Value based price optimisation is only used if it will increase profit without impacting on sales. In other words, we don’t want the higher price to deter customers from buying the product, only to maximize the potential profit increase that can be made on each individual product or service. When used for the right business, value based repricing is a highly efficient repricing method to increase profit.
A typical business that uses value based repricing might sell:
- An invaluable service that will, for example, save the user £1000′s in the future such as an invaluable software plugin
- In demand and highly sought after fashion accessories and clothing
- A rare, niche product or service
- Shortage items, for example food and drink at a closed off festival
- Fundamental add-ons such as camera lenses and printer cartridges
Increase profits with value based repricing
When considering using value based pricing for your business, it’s important to have a good understanding of your customer’s perception of your service – how highly they regard it and exactly how much it benefits them. One way to research this, is to carry out surveys on existing customers. If you have a product that you currently sell for £50, but it turns out to be saving customers £500 a year, you might increase profit by raising your price to £150.
Of course, it’s important to be careful not to get carried away and charge too much. If your prices are clearly considerably higher than your costs to customers, then you run the risk of losing sales and giving the impression of exploitation (see Psychological Repricing). If optimising prices at a balance though, you can drastically increase profits without affecting sales.
Combine value based pricing with automatic price tracking and dynamic price updating to stay one step ahead of competition with The Repricing Company.
For online businesses, setting the right price for your product is one of the most important decisions involved when increasing sales. One of the biggest factors involved in setting product prices is the prices offered by your competitors.
Competitive pricing is a product pricing method based on the prices of competing businesses. This can involve repricing your products above, below or the same as your competition’s. However, usually, competitive pricing is associated with undercutting the product prices of your competitors. It’s important to choose the right method when repricing competitively – price too high and you’ll lose sales, price too low and you may end up losing money. Typically in competitive business sectors, it is the larger companies who tend to set a price leadership role that wise smaller business will follow.
Types of competitive pricing
- Below Competition Repricing - Repricing products to undercut competitors is usually used for ‘stealing’ customers from other businesses. If you are careful not to undercut so much so that you end up making a loss, then this is a great method for increasing sales. Apart from a larger customer base, another great benefit of higher sales is an increased market share. However, repricing below competition does have it’s disadvantages too. This kind of pricing strategy can create a hostile business environment with your competitors. In many cases, this will lead to price wars – not an ideal long term route for businesses involved.
- Above Competition Repricing - Online business that price above competitors are usually seen as the market leaders in their product sector. Higher pricing methods are typically used to increase reputation and brand image, or to give the impression of a premium product of higher quality and uniqueness.
- Parity Pricing - Parity pricing is one of the safest repricing methods where the business sets their product price to be the same as their competitors. When charging the same price as your competitors, it would be wise to make your business more appealing or convenient for customers in some other way. This can be the simplest thing such as a more user-friendly website design, free shipping or inviting refund policies.
When repricing competitively, it’s important not to be too aggressive in your pricing methods as this can be considered as Predatory Pricing. This involves lowering prices for the sole purpose of driving competitors out of business, which is actually illegal practise. However, offering lower prices than your competitor simply because you can afford to do so – this is a completely healthy form of competitive repricing.