We last left off our pricing discussion talking about the importance of knowing your market. One tried and true way is a supply + demand curve. While economics is one of my absolute passions and accounts for a large field of concentration of my Master’s Degree, it may not be as relatable to all. So let’s take a step back in order to move forward with discussing cost plus pricing. Is it a good fit for your business model? I will let you be the judge.
When creating a product for market, of course you need to consider all of your costs are associated with producing the soap. Enter cost plus pricing.
Many soapmakers calculate their cost of production, determine their desired profit margin, add the two figures together and viola, the product cost is set. Here is a simple example:
Many soapmakers calculate their cost of production, determine their desired profit margin, add the two figures together and viola, the product cost is set. Here is a simple example:
Cost plus pricing is really the simplest and rawest method of determining a pricing strategy. It can, on occasion, be effective however this method involves little to no market research and does not take into consideration consumer demands. The mark up is really just an objective rate of return because you’ll never truly be able to calculate all of your costs to the penny {due in part to an ever fluctuating market} nor does a random rate of return have much to do with how much your customers are actually willing to spend.
Nevertheless, cost plus pricing does have some advantages.
- It's a popular strategy among small businesses because it is very easy to come up with a price by adding up the cost of goods then adding a markup percentage.
- When you have little to no factually data about customers spending habits and/or there is no direct competition in your marketplace and all you have to work with is the calculation of your costs. In this case, the cost plus pricing strategy allows a starting price to work with.
However, cost plus pricing is plagued with disadvantages.
- It pays no attention to an ever-changing market and customer base. This ultimately also ignores the fluctuation of your supply and manufacturing costs.
- It involves no before, point of sale or after trade research. Based on price alone; Did you meet your customer's perceived value of the product? Would that customer be willing to pay the same cost again for the similar bar of soap? Or would he/she be just as willing to purchase from your competitor? Frankly, you do know any of these answers when basing your prices on cost of goods plus a pricing a margin.
Cost plus pricing is simple and easy to use, this is why so many new and small business owners use it. I am certain in saying that that cost plus pricing is the model that largest percentage of online pricing calculators are built upon. But what it accomplishes in simplicity it lacks in real world demographics.
You must know your market to effectively price your soaps. Keep abreast of what the others around you are doing and always, always communicate with your customers to ensure your prices remain favorable. Your price is the first and possibly the last impression you will have on your customers {negative pricing is one sure way to alienating customers}. So be sure to get it right. Over the course of these Soaping101 pricing blog posts, you are certain to discover the one that works best for you.
Nevertheless, cost plus pricing does have some advantages.
- It's a popular strategy among small businesses because it is very easy to come up with a price by adding up the cost of goods then adding a markup percentage.
- When you have little to no factually data about customers spending habits and/or there is no direct competition in your marketplace and all you have to work with is the calculation of your costs. In this case, the cost plus pricing strategy allows a starting price to work with.
However, cost plus pricing is plagued with disadvantages.
- It pays no attention to an ever-changing market and customer base. This ultimately also ignores the fluctuation of your supply and manufacturing costs.
- It involves no before, point of sale or after trade research. Based on price alone; Did you meet your customer's perceived value of the product? Would that customer be willing to pay the same cost again for the similar bar of soap? Or would he/she be just as willing to purchase from your competitor? Frankly, you do know any of these answers when basing your prices on cost of goods plus a pricing a margin.
Cost plus pricing is simple and easy to use, this is why so many new and small business owners use it. I am certain in saying that that cost plus pricing is the model that largest percentage of online pricing calculators are built upon. But what it accomplishes in simplicity it lacks in real world demographics.
You must know your market to effectively price your soaps. Keep abreast of what the others around you are doing and always, always communicate with your customers to ensure your prices remain favorable. Your price is the first and possibly the last impression you will have on your customers {negative pricing is one sure way to alienating customers}. So be sure to get it right. Over the course of these Soaping101 pricing blog posts, you are certain to discover the one that works best for you.
