Beyond Cost Plus Summary: November 2015

Nov 30, 2015

 

A look at how understanding the way customers assign value sometimes means less car costs more money and further evidence of the death of cost plus pricing.

 

Adherence to a basic cost-plus formula would mean that a product with fewer features (cheaper to make) would cost less than one with more features (more expensive to make). Better pricing looks beyond cost to how customers value the attributes of a product and prices accordingly - with surprising results.

High performance cars are a perfect example. Some manufacturers (including Porsche, BMW and Ferrari) sometimes release models that have fewer features but higher prices. Why? Because these features are dropped to decrease vehicle weight and improve performance. This customer isn't interested in features, they're interested in lighter weight and higher performance. By recognizing that, and charging accordingly, these companies realize greater profits than a simple cost-plus formula would allow.

Another post looked at how Kate Spade joined other retailers like Saks Off Fifth, J. Crew and Michael Kors in being accused of violating consumer protection laws by using price tags that advertised discounts from original prices that never existed at their outlet stores. This willingness to break the law demonstrates just how powerful the anchoring effect is – even as some retailers are being aggressively named in lawsuits others continue to exploit the practice.

Also – a look at some of the firms (Simon Kucher & Partners) and other resources dedicated to pricing strategies is offered as evidence of the widespread adaptation of more advanced pricing methods. If it was still as simple as cost-plus all this wouldn't be needed.



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Category: Examples

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