Do not use a cost-plus pricing (cost plus markup) model in your company. It is a very non-optimized pricing playbook. Customers do not buy your products because of how much it costs you to produce them. In other words, customers do not care what you have put into the factors of production. What they want is VALUE!
So, when you price, focus on value, and that means, use a value-based pricing model. Of course, as you do that, you need to understand your cost, including the fixed and variable costs. In a strong position, you can add more on the cost-plus but in a worst case scenario, the value-based becomes cost-plus (typical in commoditized business).
In elementary physics, friction is a force. To overcome friction, you need another force. In the market, customers’ problems are market frictions. To overcome them, you need to create products and services which are the most powerful forces in market systems. Products deliver value!
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It is the value you create that customers buy, and not how much it costs you to produce it. Communicate VALUE in the market and thrive.
Learn from Tesla which has been communicating Value on its cars. But recently, it has also started emphasizing “cost” as markets shift: “Tesla’s tactic of pruning back prices this year is beginning to bear fruit. The electric vehicle maker enjoyed a five percent sales increase in the first quarter and delivered a record 422,875 vehicles, which was just below Wall Street’s estimates.”
Tesla’s tactic of pruning back prices this year is beginning to bear fruit. The electric vehicle maker enjoyed a five percent sales increase in the first quarter and delivered a record 422,875 vehicles, which was just below Wall Street’s estimates. The company has addressed the long waits — typically driven by limited production capabilities — that have often marked the buying experience by ramping up outputs at plants in Austin, Texas, and in Germany. Still, some analysts are concerned about whether Tesla can maintain the growth without further price cuts.
Tesla’s first quarter deliveries represent a 36% increase compared to the same period last year and 4% more than its previous quarter. Its previous delivery record was roughly 405,000 cars in one quarter.
Tesla recently issued a recall for 35 of its electric Semis over a faulty parking brake.
The company is also facing a probe from the National Highway and Traffic Safety Administration over malfunctioning seat belts.
Tesla shares fell as much as 5% Monday morning.
Comment on Feed
Comment 1: Prof, considering the Tesla example, will it be accurate to say that in an economic boom consumers are value sensitive, while in an economic crunch they become price sensitive?
And how about the big boys and girls in the luxury consumers bracket?
My Response: In the luxury business, “price” is not a factor since it is luxury. We are focusing on a typical elastic demand market. Value-based model wins when you have a strong market position (category leader, monopoly, strong leverages, etc). Cost-plus is for the commoners where the value is the “price”.
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A product is rated by the job it does, and not what it took to produce it. Once it does a great job, you can make extra money by talking about what it takes to make it, giving it additional value and prestige.
True, Francis. Thoughtful addition. The process of actualization matters.