The Price is Right - Not!

Last year, Forbes magazine profiled Vextec, a company that has developed a very accurate approach to predicting how materials behave under operational conditions. This company's product promises to revolutionize the economics of design, reducing barriers to entry in several capital intensive industries. What struck me most about the article was the price charged for the services. It seems that the company charges customers based on their own costs (plus a markup) rather than the value their product brings to the customer. I suspect that most manufacturers of engineered products follow a cost-plus approach to pricing. This might be partly due to competitive pressures and partly to the simplicity of the cost-plus approach. However companies that rely on the cost plus approach are limiting their growth and their profits to a fixed multiple of their assets. Such companies might be better served by using value-based pricing. For instance the subject of this article offers a service that allows manufacturers to circumvent several expensive iterations significantly reducing the cost of development. By using cost-plus pricing the company is limited to the amount of work it can handle by leveraging its existing man-power. Value-based pricing would allow Vextec to pick projects where its services bring the greatest value and therefore the highest return to the company.   Value-based pricing trains a company to better understand its customers. Such understanding inevitably results in products and services that offer customers what they value most. Following the value approach enables companies to charge a fair price (based on the value they offer) and  improve the efficiency of their own operations.              .

draf