A GUIDE FOR PRICING STRATEGIES

Cost Based Pricing

What is it?

Cost-based pricing is price setting based on the actual cost of producing the product or services, including all aspects from production to marketing and distribution. In order to set a price after calculating the cost, businesses will tend to choose one of two strategies: cost-plus pricing (also known as markup pricing) or break-even pricing.

How to use it?

Cost-based pricing is one of the most simple strategies and one of the easier ones to start with. Nonetheless, it brings a lot of advantages. You can implement it in the following use cases.

Ensure profitability with a constant margin
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Determine the minimum price for your products
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Quickly respond to changes in supply and demand
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THE GAINS

Benefits of Cost-based Pricing

1

Easily calculate your costs and implement better prices

This pricing strategy requires very few simple calculations. The only thing you need to take into account is your costs, which you can divide between variable and fixed. Therefore, it is very easy to implement in comparison to other pricing strategies
2

Cover all your expenses with the price of the product

Making your prices based upon your costs ensures that you can always cover all your expenses per product sold. While other price strategies may require you to lower your costs in order to be profitable, this pricing strategy takes your costs as the cornerstone of your pricing.
3

Justify price increases more easily

In some industries or markets, it is necessary to communicate why your pricing is as it is. With this pricing strategy, you can easily communicate price increases to your customers, since you can explain that your prices can rise based on the costs you have.
INDUSTRY TRENDS

Who is using it?

Manufacturers

These companies use cost-based pricing to determine the price for their products by adding up the resource and manufacturing costs. After that, they can figure out how much they need to make to break even per week, month or year. After determining the desired return in percentages they can add this percentage as a markup to their cost price.

Airlines

These B2C companies use a cost-based pricing strategy to determine the final price for customers. E.g. when you buy a ticket for a holiday on a tropical beach, most often you pay for the ticket plus extra money for additional services such as luggage, or larger seats. These add-ons cost more and are thus passed on to the customer plus an additional markup.

 

 

The most common challenges pricing managers face today

  • Are your cost prices frequently changing? Do you have difficulties constantly updating your prices to retain your margin? Using price management software such as SYMSON, you can automate your price changes to accommodate for changes in costs. With the help of our price management tool, you can keep your profit margins at a constant level.
  • Are you manually increasing the prices of your products? Is your current price management solution time-intensive and unintuitive? With price automation software such as SYMSON, you can manage all your cost prices efficiently. You can adjust your margins for every product by creating a strategy that will automate your process entirely.
THE DISADVANTAGES

Disadvantages and how to handle them

Doesn’t take demand into account

While you may set a profitable price for your company, there may be no demand at this price. Therefore, there you should always take demand into account when setting your price.

Doesn’t take competitors into account

Your price may create enough demand, but when competitors change their pricing, your cost-based prices may start to be unattractive. Therefore, businesses should also look at what competitors are doing.

Reduces the incentive to become more cost-efficient

When you take your costs as the starting point, you may not focus on cutting costs to increase your profit margin. Therefore, you shouldn’t forget about reducing unnecessary costs as well.
HOW TO SET IT UP

How to implement in SYMSON

The cost-based strategy is one of the simplest pricing strategies to calculate and implement. Even if you have a simple price management tool it can be applied. However, if you want to bring your pricing to the next level you may need to utilise a smart price solution such as SYMSON, which enables you to make multiple strategies and automate your pricing. We recommend the following steps in order to maximise your pricing potential:

Calculate the fixed and variable costs for each of your products
With the costs calculated you can determine your break-even price
Make a secure data connection with your chosen systems to continuously update prices
Create a pricing strategy and apply the desired business rules
Apply your prices and test them
Analyse the results and make adjustments

How to combine with other pricing strategies?

A cost-based pricing strategy can be a great pricing strategy and many businesses use it. However, this pricing strategy can best be seen as a starting point in your pricing process, after which businesses should ideally combine it with other strategies. The downside of this pricing strategy is that it takes only 1 factor into account that influences pricing, while there are many more. A value-based pricing strategy or a competitive-based pricing strategy can take the cost-based pricing strategy to another level and help it take more price influencing factors into account. Also calculating the price elasticity per product (group) can help to set more optimal prices for products.
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How to use Cost-based Pricing in SYMSON

How it works
How to combine different pricing strategies
How to get recommendations for the perfect pricing
How to track competitors

Summary

  • Cost-based pricing is price setting based on the actual cost of producing the product or services, including all aspects from production to marketing and distribution.
  • Cost-based pricing is easy to calculate and implement, covers all expenses and can justify price increases effectively to customers.
  • Cost-based pricing strategies perform best when combined with other pricing strategies such as value-based and competitor-based pricing strategies.

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