Cost-plus pricing, n. gerund, delusional.
- From “The Strategy & Tactics of Pricing” Nagle & Holden, 2nd edition (1987 & 1995):
Cost-plus Pricing:
– “carries an aura of financial prudenceâ€
– “blueprint for mediocre financial performanceâ€
– “impossible to determine product’s cost before a price has been setâ€
cost = Æ’(volume) = Æ’(price) but if price = Æ’(cost) then you create an infinite loop which can will lead to the wrong solution (“flawed circularity†or – speaking in engineering rather than tabloid terms – catastrophic)
– creates a catastrophic cycle of a decline when competition increases: volumes decline, then overheads allocated to the products will increase leading to increased prices, which in turn will drive volumes down, increases overheads …. etc
2. Cost-plus pricing assumes costs are accurate, which is rarely the case, and, in reality, there is no good way of defining – let alone allocating – overheads:
cost = Æ’(allocations) = Æ’(volume) = Æ’(price), and again, if price = Æ’(cost) then you create an infinite loop which can will lead to the wrong solution (“flawed circularity†or – again, speaking in engineering rather than tabloid terms – catastrophic)
3. Sub-optimized pricing. Every price created by cost-plus pricing is either too high or too low. Every price could and should be improved.
