Cost plus pricing is the habit that leaves the most money on the table in a family-founded consumer goods company. The price is set by the cost, so every customer who would have paid more gets the lower price.
How cost plus pricing works in family companies
The method is simple. Take the cost of the product, add a fixed margin, and that is the price. It feels safe, because every sale covers its cost and the margin is known in advance. Textbooks also call it markup pricing.
Founders often set prices this way when the company is small. The habit then survives for years, because nothing forces a review. After a change of ownership, however, price becomes one of the largest levers in the plan.
An investment professional who follows portfolio companies names cost plus pricing as one of the first things she checks after a deal. She sees a lot of room for improvement in family companies.
What cost plus pricing ignores
A cost-based price knows nothing about the shelf. It ignores what competing products cost, what each channel pays and what the customer values.
Take a simple example. A product costs €2.00 to make and deliver, and a 20% margin gives a price of €2.40. A competing product sells to the same retailers at €3.10. If the customer would accept €3.10, the company has given away 70 cents on every unit. Nobody will see that loss in the accounts.
The same product can also deserve different prices in different channels. A bar, a wholesaler and a supermarket buy for different reasons. One price list for all of them ignores that.
Customers who accept every price without a question are a warning sign. They may be telling you the price is too low.
Where to start
The fix does not need a full overhaul of the price list. Start with a few products and a few customers. Choose the products where the gap to the competing shelf is largest and the customers who buy the most of them.
Our guide to price pack architecture shows how to build the price gap against a reference brand. Use it to decide where each product should sit.
Small changes teach the team what the market will bear. They also give the company evidence before the next, larger step.
Cost plus pricing and the sales team
A new price list fails if the sales team does not accept it. Reps who have always sold at cost plus 20% will go to the customer, hear the first objection and offer a discount. Within a few months, the new prices have been given back.
Therefore, prepare the team before the change. Show reps the gap to the competing shelf, give them the reasons the product deserves its price and practise the first objections with them.
Three moves for the first year
First, review prices against the competing shelf and the channel. Map each product against its closest competitor in each channel.
Second, start where the gap is largest. Move a small number of products and customers first, and watch the reaction.
Third, train the team to defend the new prices. The FMCG Growth Sprint includes an assessment of the sales team’s process and pricing, and online training for the field.
A price that a rep gives back in the first meeting was only ever a first offer.
Frequently asked questions
What is cost plus pricing?
Cost plus pricing sets the price by adding a fixed margin to the cost of the product.
Why is cost plus pricing a problem in consumer goods?
It ignores the competing shelf, the channel and what the customer values. As a result, it leaves money on the table.
How do you move away from cost plus pricing?
Review prices against the competing shelf and the channel. Change a few products and customers first, then train the sales team to defend the new prices.
Why do price rises get given back in discounts?
The sales team was not prepared for the first objection, so reps offer a discount to close the sale.
To see how the first year after a deal can be organised, read about the FMCG Growth Sprint.
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