‘Why the Cost-Based Pricing Model Is Broken’ – HubSpot
Angela O’Dowd says, “Most businesses, not just agencies, start off charging for their products and services based on their costs. This is a mindset that has been carved in stone since the Industrial Revolution — and has grown alongside accountants and bookkeepers demanding to know the cost of everything, but who often overlook the value being delivered. (Remember Scrooge?) For more than 100 years, we’ve all been held hostage by this cost-based pricing mindset.
Don’t get us wrong. Knowing your costs is vital to understanding your profitability. But the problems start when you base your price on costs. Cost-based pricing sets you up for an adversarial relationship with your clients from the beginning.
What Is Cost-Based Pricing?
Cost-based pricing is a method for determining your selling price. It’s relatively simple. You calculate what it costs to produce your product (or service), set desired margins, add those margins to your costs — et voilà! There’s your price. Fairly straightforward, and easy to plug into a calculator. Accountants love this approach because it uses “hard” numbers — numbers that are easily attributed and measured“.
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