Don't Price by Cost Computation

A common but lazy and naive approach to pricing is to simply take the product's manufacturing cost and add a standard, acceptable margin. This method of "pricing by computation" is a flawed, internally focused process that ignores the realities of the market.

The first pass at pricing a product should be made without any knowledge of its cost.

The Problems with Cost-Plus Pricing:

1. It Ignores Customer Value: The price is based on what is acceptable to the company, not on the value the product provides to the customer. This means you are not charging what the market will truly bear.
2. It Misses Opportunities:
   • For High-Value Products: It misses the opportunity to charge significantly higher margins for unique products that provide immense value to the customer.
   • For Market Penetration: It misses the opportunity to price a product aggressively low to rapidly penetrate an important market and build a commanding share.
3. It Stifles Creativity: It turns pricing into a simple calculation, preventing the creative and dramatic solutions that can win a market.

A product's cost determines a company's willingness to compete for business at a certain price. It does not determine the price a customer is willing to pay. That price is determined by the value of the solution to the customer.