Profit-based Pricing Laying the Foundation for Your Pricing Strategy

Companies today can select from several different complex approaches to price strategy. Some perform price waterfall analyses, others create intricate price matrices, and still others optimize revenue by using advanced mathematics. However, the reality is that most distributors rely on Cost Plus to set pricing. When tasked to improve margins, these distributors ask, “Is our plus enough?”

If the company’s goal is to maximize profits, there is a simple and fast method to capitalize on Cost Plus pricing for better margin management.

In this paper, the author focuses on one simple strategy – use pricing to optimize profits. With this strategy, companies can have total visibility into the true cost and profitability of their products. For companies using Cost Plus pricing, this provides a strong, fact-based foundation for managing margins and pricing practices – and, it delivers a dramatic increase in operating profits.

Over the past 10 years, there has been a lot of discussion about the importance of good pricing strategy. In the 1990’s, companies implemented value-based pricing by quantifying the value of their products and services to their customers. A few years later, price waterfalls were the rage, showing companies the impact of freight, commissions, rebates, and other adjustments. Around that time, the advent of data warehouses enabled price matrices to be an effective tool. Companies could differentiate their pricing around unique micro segments. Since 2000, companies have begun to leverage mathematical algorithms to predict demand patterns. These solutions have helped companies make pricing decisions more efficiently. But have these solutions made them more profitable? In other words, are their pricing programs profit-based?

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