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Value based or cost plus price model

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Are you struggling to determine the right pricing strategy for your products? Are you torn between a cost-plus approach and a value-based approach? In this blog post, we'll explore the difference between these two pricing strategies and how they can impact your bottom line.

First, let's take a look at the traditional cost-plus pricing model. This approach is often used because it's simple and easy to understand. You simply add a markup to the cost of the product to determine the selling price. However, this linear relationship between cost and price can limit your ability to maximize profits and can also lead to missed opportunities for pricing your products based on the value they deliver to customers.

Now, let's compare this to a value-based pricing model. This approach takes into account the value that the product or service provides to the customer, rather than just the cost of production. This allows for more flexibility and can result in higher profits in some cases. However, it also presents a greater challenge in terms of determining the right price for each product or service.

The diagram below illustrates the difference between these two pricing models. The blue dots represent a traditional cost-plus pricing model, while the orange dots represent a value-based pricing model. As you can see, the spread for bottom line profit (price/cost) varies much more with a value-based pricing model, but overall profit is the same.

So, how do you "tune" a value-based pricing model? Advanced data analysis based on data from your CPQ (configure, price, quote) system can help you find the sweet spot for each product or service. By analyzing data on customer behavior and preferences, you can gain a deeper understanding of what value your products deliver and how to price them accordingly.

If you're interested in learning more about how advanced data analysis can help you optimize your pricing strategy, don't hesitate to get in touch with us. We'll be happy to help you find the right approach for your business.

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