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.
Psychological Pricing Explained
Psychological Repricing is a dynamic price updating method typically used to adapt a pre-established ballpark figure for your final selling price. In other words, to adjust prices after you have worked out your costs and required profit margins (using cost plus pricing, for example). Psychological pricing goes a little deeper, delving further into customer habits and perceptions.
Price optimisation with psychological repricing
The most common, everyday use of psychological automatic price updating in business today, is the dropping of prices so that they end in 99 or 95 pence or cents. This gives customers the impression that the product is cheaper and so a little more guilt free and assuring to purchase. After all, £19.95 seems much more appealing to spend than £20.
Many customers have a tendency to notice the left most digits more so than the right digits. Therefore, £19.99 seems much closer to £19.00 than it does to £20. Furthermore, numbers in their twenties seem much larger than those in their tens, even if it is just by a few pennies. This is known as the left digit effect.
Benefits of psychological repricing
At just a small cost of literally pennies to your business, optimising prices using this method is a highly successful way to increase sales. You can continue price tracking competitors and use automatic price updating with the Repricing Company to keep your prices even more ‘psychologically’ desirable for customers. An easy way to increase sales!