Carragee Consulting

Manufacturers work to “cost out” aspects of their production and distribution processes so they can ekk out more margin and remain competitive.

When they price based on their standard COGS + a target margin to cover fixed overhead they aim to prevent sales below marginal cost.

One downside to this strategy is that if they continue to use it as their costs fall, they pass their operational efficiency along as price drops to their customers, regardless of competitive pricing.

Akin to Moore’s law where microchips are increasingly productive, that cost of data storage and transformations keep falling.

When usage based pricing for SaaS companies is tied strongly to data volumes is similar to usage metrics that aligned pricing to internal costs it can have the same unintended consequences as when physical, material input costs fall.

Noone would call usage-based pricing cost plus, but it can have similar pitfalls.

I recommend reading Danilo Zatta’s Pricing Model Revolution. He’s got great examples of how companies are aligning pricing metrics to customer value using newly available data from the IoT and increasing analytics capabilities.