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How Cost-Plus Pricing Craters Markets

Since I first became heavily involved in pricing well over a decade ago, I’ve often thought how nice it would be to be able to invest in companies based on their pricing capabilities and practices. I’d love to buy a mutual fund full of companies with rigorous pricing practices…and at the same time, sell short the cost-plus crowd.

This thought crept into my mind again as I was reviewing a case study for the PricingBrew Journal called, How to Crater a Market with Cost-Plus Pricing.

The case details a large manufacturer’s approach to pricing a new and innovative product…and the $1B+ disaster that resulted. It’s a great example of the “good, bad, and ugly” case studies we like to publish in the Journal. From our perspective, mistakes are just so much more instructive…and more entertaining…than successes.

But this case is also a great reminder about how many of the most important pricing decisions are made very early in the product lifecycle…by people who very often have no clue about pricing.

Watching over the shoulders of this company’s product managers as they determine the initial pricing levels for this new product is frustrating…and a bit scary. It’s like watching a train wreck in slow motion. As someone with knowledge of pricing, you’ll know exactly what these product managers are doing wrong. And you’ll probably even be able to predict the carnage that eventually unfolds.

Upon reading this case, you’ll no doubt be shaking your head in disgust.

But don’t think for moment that it’s an outlier or some unique situation that rarely occurs. Every day, product managers in companies all over the world are making pricing decisions with massive and far reaching implications. And too often, they’re making these critical decisions with very little knowledge of pricing.

As a pricing professional, you have a choice to make…

You can try to make the best of these bad decisions through tactical pricing and discounting tweaks after products have already been introduced. Or you can expand your scope and work on having a positive influence in the new product development process.

PS: If you choose the latter…and yours is a public company…please send me your stock symbol. My portfolio thanks you in advance.

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