 Welcome to Enhanced Stop Training YouTube channel. In our last pricing video, I took you through four reasons why you need a clear pricing strategy. Why you'll get more sales and more profit if you invest time in your pricing. However, I didn't tell you about any of your pricing options, so let me rectify that now. In this pricing strategy series, I'll take you through three founding pricing methods and why you should or shouldn't use them. Pricing your products can be a minefield that many people simply shy away from or try to ignore. But your business will thank you and reward you if you give pricing the time and effort it deserves. We're going to first look at the pricing method that 80% of businesses use, cost plus pricing. And in this video, I'm going to tell you what it is, why it works and doesn't work and where it works best. My name is Anna Taylor and if you're new to this channel, Enhanced Stop Training provides online business courses to help professionals, managers and business owners improve their performance. For over 15 years, I've worked in finance alongside sales and marketing teams. I've seen firsthand the importance of getting that pricing right. From training sales forces and marketing teams in margin and pricing, well to co-designing and calculating the impact of an entirely new price pack architecture and pretty much anything to do with pricing in between. Now, they say that pricing is either your most powerful weapon or your worst enemy and I want to help you make sure it's the former for you. If you like this video, please give it a thumbs up and subscribe and share it with friends. Pricing strategies are the approaches that businesses use to price their products correctly and in line with current market demand. They help you to discover the best possible price for your product depending on how you want to position it and prices fundamental to your business and it's the most important factor in profitability. Now there are three groups of pricing strategy. Pricing is either cost-based, demand-based or competition-based and there are several strategies within these groups. Now when you're deciding on a pricing strategy, you should assess the different types of strategy and the reasons for choosing one over another. This pricing strategy series explores some key strategies for getting the price of your product just right. We're going to start with cost plus pricing. Why? Well, because that's where most people start and actually usually where they stop too. But before you blindly copy the method that about 80% of other businesses are using, let's stop and explore it to see if it really is the right method for you. What is cost plus pricing? Well, cost plus pricing is the simplest method for pricing a product. And in fact, it represents the basics of doing business. You make something, then you sell it for more than you spend making it because you've added value by providing the product. It's a simple method that in theory at least ensures a profit. Now the method itself is very simple. You simply add together all your costs of a product and add your markup to make your price. Now you may choose an absolute number to add or more likely a percentage. But as a side note or my tip of the day, remember that your markup percentage will not be the same as the margin percentage you'll make. Now I'll go into detail of this another time or you can find resources in the pricing hub on our website that lay out the differences and stop the confusion. And there's even a conversion chart which people find particularly helpful. But in its simplest form, this method simply looks at your internal costs and adds a bit to ensure you make a profit. But it doesn't consider any other factors such as what your competitors charge or what consumers are willing to pay. Who uses cost plus pricing? Well, I recently saw the result of a business survey that found that out of thousands of businesses questioned 80% use cost plus pricing even though many of them know there are better methods out there. Many of these businesses use cost plus pricing as their main pricing strategy when releasing new products or have little time to spend on pricing. And traditionally, fashion brands relied upon cost plus pricing for its simplicity and convenience. However, due to the increased consumer awareness of retail prices, well especially online, consumers are searching for the best prices, which means that this method is no longer quite as relevant as it used to be. Because, well, quite simply the competition can't be ignored anymore. Why is it great? Well, there are plenty of reasons that this pricing strategy is so popular and it does have its advantages. Well, first of all, it's extremely easy to apply. It's straightforward to, well, to list your products, their costs, then add a simple formula to add some profit and create your prices. You don't need any specialist skills and it can be done straight away as soon as you have your cost information. And for those that have to price, well, hundreds or even thousands of products at the same time, this is clearly a lifesaver as the method is not only simple but also time efficient. And it can be vital for companies to keep their costs down as the method takes up well fewer resources both in terms of time and money. But secondly, if calculated correctly, it makes sure you cover your costs and that you do make money on each sale. If you had simply, well, copied a competitor's price without analyzing whether you could afford to, you could be setting yourself up for trouble. You need to know and understand your costs so you know what you can and can't afford to do. At the very least, this method should be combined with others to make sure that a profit could always be made. And finally, this method is justifiable to customers. Well, not that I would ever advocate sharing your costs or your costing methods with your customers. But if you are challenged on price, you would have the option of being very clear why you can't go below a certain price, i.e. your costs. Be warm, though. Never give out any cost information to competitors or customers. What about the watchouts? Because it's not all good and I personally think this method is far too basic and does not get the most value out of your products. Normally it makes you the most money. So let's look at some of those watchouts or disadvantages now. Well, first of all, it completely ignores competitors' prices. I mean, it's all very well if your cost plus prices are well in line with your competitors. But what if they're not? What if your cost plus price comes out well much lower? If you sell at that price, you may take sales away from your competitors, but you've also lost out on potential profit. And if your price comes out much higher than your competitors, well, what then? You would be as attractive and may not get sales as consumers are, well, they're used to paying that low price. And secondly, it neglects product value. Two items that produce the same at the same cost might deliver extremely different values to the customer. So they should have different prices. If you ignore the value you're giving to the consumer, you may well be leaving money behind on the table. They may have been willing to pay more and you will have lost out. Now, finally, there is a watch out in how you do this method rather than in the exact method itself. Because you must be careful to include all your costs and your calculations as it's all too easy to miss something out. Now, this might be okay. We'll be at an ideal if it's something really small, but not if it makes a significant difference. And I've known businesses that failed because they did not calculate their costs properly. Now, when I use this method, I advise to add up all your business costs, even those such as time to really understand what you need to cover with your pricing. Now, there are product-related costs like ingredients, packaging, production. Well, and don't forget the costs for shipping and for distribution, including any extra packaging. I also like to add up all the costs that your business has to pay or whether or not you sell any items because you need to know that your profit can cover these costs too. And remember to look at the future of your costs. Are your costs likely to go down if your volume increases? Are the raw materials likely to be more expensive in the near future? Take all the information you have into account in order to really be thorough with this method. Even though cost plus pricing is a very different method, it certainly does have its merits as it's simple and easy to understand. However, using cost plus pricing as the sole pricing strategy does reduce your competitive strength as it doesn't take competitors or consumer behavior into account. It's great to use it as the base of your strategy to make sure that your prices do not go below your costs so you continue to make a profit. Remember to always include all those costs though. Next time, we're going to be looking at competitor-based pricing. So tune in to see how your pricing can be impacted by your competitors and their pricing. Now, if you need a few pointers on how to choose a pricing strategy or some extra pricing advice, visit us at Enhance Stop Training and select articles, or better still, sign up to the Pricing Learning Hub for access to pricing calculators, fact sheets, how-to guides and more. If you like this video, please hit the thumbs up button below and subscribe or hit the bell to get notified for our weekly video releases. This really helps us produce more videos to help you. Thank you again for watching and I look forward to seeing you soon.