March 18, 2020

The Pros and Cons of Cost-Based Pricing for Businesses and Why Pricing Optimization Tools are the Next Frontier in Business Development

Pricing for BusinessesIn most service-based industries, pricing is a controversial topic simply because there are no hard and fast rules to pricing your services. However, there are some common pricing strategies that you can use to price your services. Cost-based pricing is one example.

What is cost-based pricing? It is a pricing method in which prices are set based on three different costs: the cost of production, distribution, and sale. Widely used by businesses in the service industry, cost-based pricing sets prices for services based on time and materials. How does this pricing method work? let’s find out.

How Cost-Based Pricing Works for Service-Based Businesses

The first step in cost-based pricing is establishing an hourly rate for the services offered. The next step involves combining any additional expenses incurred with the costs of any hours required. Businesses can then charge accordingly.

The basis for pricing in this pricing method is the cost of production. This means that you are required to add a profit level to determine pricing for the product. If you use this pricing method to set pricing, then you’ll need to use your costs to find a price ceiling and a price floor. What are price floor and price ceiling? They are the minimum and maximum prices for a specific product or service I.e. the price range for the product/service.

Generally, a business would price at a floor in case the competitive price is under the floor; the business may also try to lower the floor costs by lowering its own costs.

The Pros and Cons of Cost-Based Pricing

For most companies, the ideal strategy when pricing based on cost is to set a price in between the floor and the ceiling. This pricing method is used by many companies that mass-produce goods. What is the reason for that? following are the pros of using cost-based pricing:

Pros of Pricing Based on Cost

  • It is easy to understand and calculate the price
  • The pricing method covers the incurred costs
  • It can simplify investment appraisal decisions
  • The method is fair and logical
  • Can be useful when setting the price of new and innovative products

Cons of the Pricing Strategy

There are also some cons of pricing based on cost. Following are some reasons you may want to opt-out of a pricing strategy based on cost:

  • The method ignores demand and the price elasticity of demand
  • It ignores the competitive situation i.e. what competitors are charging
  • Is inflexible in the face of changes in demand levels
  • Costs cannot be measured with precision, which makes it difficult to determine
  • The method ignores capital requirements and returns on investments
  • May cause underpricing or overpricing

In addition to the above cons, many marketing experts consider cost-based pricing to be a broken model. According to them, knowing costs is crucial to understand a company’s profitability but problems can arise when you price solely based on costs.

However, this does not mean that cost-based pricing is wrong for you. Instead, it means that you should use pricing tools that allow you to choose a suitable pricing method that provides the biggest benefit to your bottom line.

The Benefits of Pricing Optimization Tools in Business Operations and Development

Price is one of the most fundamental factors that help project the revenue that a business generates. Pricing optimization is a technique that is used to ensure that this objective is achieved efficiently. However, with the advent of technology, things have become much simpler.

Softwares and various digital platforms have been introduced to provide a further boost to the efforts to strengthen business operations. As a result, organizations with the appropriate structures are doing amazingly for themselves.

A pricing optimization tool or software needs no introduction. It is simply a program that automates simple analytical tasks that would otherwise be executed manually. This usually meant errors because humans are more prone to them than machines.

So, to improve processes, state- of- the- art tools were brought in so that organizations could save a lot of time, effort and other resources while implementing strategies like pricing optimization. Here we shed light on some other benefits that these tools offer businesses to achieving their objectives:

1.      Ease the Load on Finances

A business has to employ a number of elaborate techniques in various departments in order to stay ahead of the competition. These include sales performance management, search engine optimization for digital marketing tools as well as pricing optimization amongst many others. These are imperative tools but can cost the company huge loads of money.

Softwares work wonders in this regard. They make the analysis and evaluation of data as simple as 1, 2, and 3. This means that small teams can churn out the vast amount of useful information that is simple enough for decision-makers to comprehend. As a result, a lot of financial burdens are lifted off the company.

2.      Automation

Computers and software programs are improving every single day. At the same time, the number of errors, speed, and performance is also growing every day. In the midst of all this, manual implementation of extensive processes like pricing optimization is impractical and therefore, becoming obsolete.

This is promising for organizations because pricing optimization software can create more productive results and reports faster and more accurately than ever before. This means that operations are much more streamlined than ever before.

3.      Optimize Promotions

Among a load of other benefits, a pricing optimization software has the ability to quickly crunch big data and provide an executive with the opportunity to introduce promotional pricing strategies that can help them trump the competition quite effectively.

This can give them a competitive edge in the market as well as the industry. Additionally, customers become more inclined towards the brand for future purchases.

The benefits of pricing optimization tools don’t end there. There are many more advantages that the software offers to users. As a result, it is one of the most sought-after commodities in the business world today.

by Bobby J Davidson

We love our company and we love what we do.  Check out the ‘Why Percento‘ page to learn more: Love of Technology and Business!  As the President of Percento Technologies International, I provide day-to-day leadership to the company’s senior management and I am personally involved in the strategy, business development and sales activities of the firm.

The company was founded in 1999 with the purpose of providing a one call source for organizations in need of Enterprise IT Consulting and Management.  We also provide a line of products in the boutique Cloud Server space with a touch of high-end website strategy consulting and design services.   We personalizes the IT Service experience with a team approach, working with clients from diverse sectors of industry, including energy services, financial, legal, entertainment, healthcare, hospitality, retail and general and/or corporate business.