During World War II the allied forces wanted to reduce casualties of the air squadrons. The planes...
Value based vs. cost plus price model
This diagram shows price (y) and cost (x) for a product (in 50 different configurations).
The blue dot's represents a traditional cost-plus price model.
The orange dot's represents the same product but with a value-based price model.
So what's the difference?
It's very obvious that the cost-plus models gives a very linear dependency between cost and price. This makes it very easy to be sure you never loose money.
The value-based model on the other hand gives you the possibility to price based on the value delivered to the customer.
As you can see in the diagram below the spread for bottom line profit (price/cost) varies much more with value-based price model.
In some cases the price drops to low compared with cost.
The overall profit in this example is the same, but the margin for cost plus is basically 50 % for all products. For the value-based price model the margin varies from 10 % up to 90 %.
This is a big challenge. How do you "tune" a value based price model?
How can you be sure to never loose money, still sell and get paid for unique features only your product delivers?
This is one of the examples were advanced data analysis based on data from your CPQ system can do magic. Get in touch and we will tell you more.