Cost Plus Buying

One trick that professional purchasing organizations commonly use today is to tear apart your product, calculate how much it costs to make, and then negotiate with you starting at your cost.  This makes it challenging to sell value.

Interestingly, as consumers we do the same thing.  When you buy a car, do you try to find out the dealer’s invoice price to help with your negotations?

In fact, we assume that companies price using cost plus.  For example, when a company tells you they have a fuel surcharge because the price of gas has gone up, this implies cost plus.  When Hershey’s says the price of chocolate is going up because sugar prices go up, we think cost plus.  Every time we see an announcement that oil prices have gone up, gas prices go up instantly.  This implies cost plus.

How about when a disaster hits an area and the store sells bottled water at a price much higher than normal.  The store owner is selling value, but we’re upset because we believe he should be cost plus.  (I’m not suggesting you gouge customers during a disaster.  Just using this as an example.)

I once consulted with a couple guys doing consulting.  They knew they wanted to use value based pricing, so when a client asks them what they charge, they used to say, “we have to wait until we understand how much value you get out of this.  Then we can give you a price.”  They were effectively telling their potential customers there were going to “gouge” them.  Ouch.

The point is buyers assume you price using cost plus.  Although it is much more profitable to use value based pricing, you want to allow your customers to continue to believe you use cost plus.

All you people selling software, you have this easy.  There is no variable cost, so everyone assumes you are selling value (or development costs).  Cost Plus Buying only applies to products where there really is a cost.

The lesson: use value based pricing, but look like you are using cost plus pricing.  Just another reason why pricing is … secret.

 

Mark Stiving, Ph.D., Pricing expert, speaker, author

Photo by Gavin St. Ours