Set Pricing Based on Actual Costs

Your Cost Plus 5% is often Cost Minus 15.3% What? You set a clear Cost Plus 5% policy. Your documentation looks perfect. The benchmark supports it (LVAS, anyone?). Your finance team nodded during the presentation. Six months later, you check the actuals. Surprise - your margin is negative. Your Cost Plus 5% became Cost Minus 15.3%. Why? Possible implementation gaps: 1. Your cost base calculation is wrong. Finance includes items that shouldn't be there. Or excludes costs that should be included. Result? The "cost" isn't actually your cost. 2. Your ERP can't handle transfer pricing. Manual processes create errors. Excel sheets get outdated. Prices stay unchanged while costs increase. 3. Currency fluctuations eat the margin. That 5% markup disappears when exchange rates move against the tested party. 4. Time lags between budgeting, cost updates and price adjustments compound the problem. Your prices reflect last year's costs while you face this year's inflation. 5. Volume changes affect your unit costs. Fixed cost allocation per unit changes dramatically when volumes drop. Fix this: ↳ Map your cost components precisely ↳ Build clear cost base calculation rules ↳ Create monthly monitoring processes ↳ Implement automated price updates ↳ Account for currency effects ↳ Track volume impacts Or, better, make sure your finance team does it. Want to test your implementation? Pick 5 random transactions. Calculate the actual margin. Compare it to your policy. How close are you to that target?

Most CFOs lose money on “cost per unit.” Not because of China, because of averages. If you benchmark “cost per ton,” you’re definitely leaving money on the table. If you see “throughput $ per hour,” you’re running a profitable division. That's the discussion I've just had the VP of a division of a EUR8bn chemical company Decisions are made based on the average cost per ton: "EUR1.2/ton versus Chinese manufacturers: EUR 0.8/ton" "We need to close a production line" "We will relocate" "We will decline a large order"... We’ve run this in 40+ plants. Most companies get this wrong. Best calls came from throughput accounting, not average cost. Here is my formula, and how to fix this: 1. Identify break‑even: fixed covered at, say, 8,000 tons/month. After that, focus on contribution, not averages. 2. Do the math right: price 1,000 − variable \600 (materials, consumables, outside processing) → throughput $400/ton. 3. Normalize by the constraint: if the paint booth is the bottleneck and SKU A needs 1.2 hr/ton, SKU B 0.8 hr/ton → *SKU A: 400÷1.2=333/hour *SKU B: 450÷0.8=562/hour Run the higher $/constraint‑hour. 4. Set rules: schedule by $/constraint‑hour, price to protect the bottleneck, cut SKUs that steal hours. 5. Review weekly: track $ throughput/hour, constraint utilization, promise‑keep; drop “cheap” work that blocks cash. Results? We cut 47 SKUs to 19, sequenced by /bottleneck‑hour; EBITDA+3.1pts in 90days Cash freed: 16.4M. Averages lie; constraints tell the truth. Are you still using averages? — ♺ Reshare to your VP or CFO, they’ll thank you. ► Like this? Join my newsletter: https://lnkd.in/dMGaUj4p for more no-BS operational excellence tips and playbook.

A company's pharmacy benefit manager charged them $487 for a 30-day supply of a medication that costs $47 at Costco. Same drug. Same dosage. The PBM pocketed the $440 difference and called it "administrative services." This happened 340 times last year. Here's the $149,600 lesson about PBM contracts. A 190-person company switched to self-funded and finally got to see their pharmacy data. The CFO started comparing what they paid versus what drugs actually cost. Atorvastatin (generic Lipitor) for high cholesterol: PBM charged $127 per month. Cash price at Costco: $9. Markup: $118. Omeprazole (generic Prilosec) for acid reflux: PBM charged $96. Cash price at Walmart: $14. Markup: $82. Albuterol inhaler for asthma: PBM charged $87. GoodRx price: $31. Markup: $56. Across 340 prescriptions, the pattern was identical. The PBM was charging 4-10x the actual cost and keeping the difference as "spread pricing." The CFO called the PBM: "Why are we paying $487 for a medication that costs $47 retail?" PBM response: "Our contract is based on AWP minus a percentage discount, which is standard industry practice. You're getting a competitive rate." Translation: "We're overcharging you using a fake 'list price' that has nothing to do with what drugs actually cost, but everyone does it so you're supposed to accept it." They fired the PBM. Contracted with a transparent pharmacy benefit administrator instead. Zero spread pricing. They pay actual acquisition cost plus a flat $8 administrative fee per prescription. Full visibility into every transaction. Same 340 prescriptions under new contract: Actual drug cost $47,200 plus $2,720 in admin fees. Total: $49,920. Previous PBM cost for same medications: $199,520. Savings: $149,600 annually. But the bigger win? Employees started actually filling their prescriptions. Under the old PBM, employee copays were calculated as a percentage of the inflated price. So that $47 drug that the PBM charged $487 for? Employee's 20% copay was $97. Most employees saw "$97 for a 30-day supply" and didn't fill it. Rationed pills. Skipped doses. Let conditions go unmanaged. Under the transparent model, the $47 drug has a $9 copay (20% of actual cost). Same medication. Same benefit design. Affordable. Prescription fill rates jumped 43% in Year 1. Employees with chronic conditions actually taking their medications as prescribed. Blood pressure controlled. Diabetes managed. Cholesterol in check. Year 2 medical claims: Down $87,000 because people were staying healthier. The warehouse supervisor who'd been splitting his blood pressure pills in half to make them last longer? Now taking the full dose. His last checkup showed perfect control for the first time in 3 years. PBM spread pricing isn't complicated. It's just theft with a contract. Most employers never see it because many plans hide the data. Your employees shouldn't have to choose between splitting pills and paying rent. Honest pricing makes sure they never have to.

Companies brag about their "transparent pricing," then you try to actually buy their product. Suddenly that $99/month turns into $347/month after you add: - Implementation fees ($2,500). - Data migration ($1,800). - API overages ($0.15/call). - Premium integrations ($49/month each). - Advanced reporting ($29/user/month). This is where Todd’s head explodes...and rightfully so. You're just looking at the cover charge, not the bar tab. The pricing page shows you the cheapest possible way to technically access the software. The ACTUAL cost is everything you need to make it work. It's like advertising a car for $15,000 but charging extra for: - Wheels ($500 each). - Engine ($3,000). - Steering wheel ($400). - The ability to actually drive it ($2,000/month). Folks have turned pricing into a shell game where the real costs hide behind "contact sales" and "custom quote" buttons. It's stupid. The hidden costs that never make the pricing page: - Setup and onboarding: Avg 15-40% of first-year contract value. - Integration development: $500-$5,000 per connection. - Data migration: $50-$200 per 1,000 records. - Ongoing support: 20-25% annual maintenance fees. - Compliance requirements: $1,000-$10,000 for SOC2, HIPAA, etc. A "$10,000/year" software purchase routinely becomes $18,000-$25,000 in year one. But the pricing page still says $833/month!!! Here's why this really sucks for everyone: - Buyers feel deceived during the sales process. - Implementation projects go over budget by 40-60%. - CS teams inherit angry customers who feel misled. - Churn spikes when renewal shows "true cost." Some companies are getting bonkers with this: - Slack charges extra for message history beyond 90 days. - Salesforce makes you pay extra for API calls to access your own data. - HubSpot charges for removing their branding from emails. "Transparent pricing" would show the actual cost to get value from the product, not just access to it. REAL transparency would be: - "Starter Plan: $99/month + $200/month average overages." - "Implementation typically costs $3,000-$8,000 depending on complexity." - "Most customers spend $150-$300/month on integrations." - "Training runs $2,000-$5,000 for teams of 10-20 people." But nobody does this because honest pricing is a competitive disadvantage when everyone else is playing shell games. IMO the companies that break from this pattern are the folks who will win. While competitors are playing pricing hide and seek, you could be the one vendor that shows real numbers: - "Most customers pay $X total in year one." - "Implementation typically adds Y% to your first-year cost." - "Here's what 90% of our customers actually spend." When everyone else is hiding costs, honesty becomes your differentiator. Stop optimizing for demo conversion rates and start optimizing for customer lifetime value. The sale you lose today with honest pricing saves you from the churn you'll face tomorrow with pricing surprises.

Pricing is one of the most difficult “skills” you’ll master in business, but most people spend their lives guessing... They figure out what they think the client wants to pay, then try to make the numbers work. That's not pricing… That's just hoping you get paid what they THINK you’re worth instead of what you’re actually worth. Real pricing starts with understanding your actual costs. Not just materials and labor… Everything. Your truck payment, insurance, office rent, and the time you spend estimating jobs you don't win. Your accountant, your lawyer, the equipment sitting in your yard that you're still paying for. The cost of carrying receivables when clients pay late. The cost of warranty calls and callbacks. Most contractors have no idea what it actually costs them to be in business. They know what they pay their guys and what materials cost, and they add some percentage on top. Then they wonder why they're working harder every year but not getting ahead. You can't build a sustainable business on guesswork. You need to know your numbers. What does it cost you per hour to keep your doors open, even when no one's working? What's your real overhead, not just the obvious stuff? How much profit do you need to reinvest in equipment, training, and growth? Once you know these numbers, pricing becomes simple. You calculate what the job actually costs, add your profit margin, and present it with confidence. If they say it's too expensive, you don't negotiate your margin away. You either find ways to reduce scope or you walk away. Stop guessing what to charge. Start knowing what your work is worth.

Struggling with tight margins on your construction projects? Here’s the truth: Many construction businesses are leaving profits on the table because their pricing isn’t rooted in financial data. You might be setting prices based on: - Competitor benchmarks - Gut feeling - A flat markup But without clear financial insights, you’re flying blind. Here’s how to fix it: 1️⃣ Understand your true costs. Labor, materials, overhead—are you accounting for everything? 2️⃣ Factor in variable project risks. Weather delays, supply chain issues, and scope creep can crush your margins if ignored. 3️⃣ Run your numbers backward. Set your profit target FIRST. Then work backward to price projects that meet that target. 4️⃣ Leverage financial tools. Job costing, cash flow forecasts, and break-even analyses aren’t just for accountants—they’re your secret weapons. Pricing isn’t just about winning bids—it’s about winning profitably. 💬 What’s your biggest pricing challenge in construction? Let me know below—your insight could help others!

Before you add one dollar of profit in your government contract pricing, you need to know what it actually costs you to fulfill the contract. This sounds obvious. It is not practiced. The number of business owners who submit a price based on what they think the product or service costs — and not what it actually costs after every fee, tax, and delivery surcharge is staggering. Then they win. Then they lose money. Then they wonder what happened. Here is what belongs in your expense calculation for a product contract: • Cost of the product itself • Tax • Shipping • Credit card processing fees • Destination surcharges — if the government is sending you to Hawaii, Alaska, or Guam, add the cost • Any ancillary fees from the vendor I had a student who won a golf cart contract. After the award, she discovered the vendor charged additional fees for credit card payment. Those fees came straight out of her margin. The government did not pay her extra. The fee was always there. She just did not look for it. The military once wanted an ATV — a Polaris UTV — priced at $20,000 base. By the time I walked through tax, shipping, and delivery fees, the all-in cost was approximately $27,000. That is the number you start with. Not $20,000. Expense clarity is not a step in the process it is the foundation of the entire process, especially if you want to build a profitable business.

We have changed how we price Future AGI more than once, and the reason is the same thing that has everyone stuck: an agent costs like infrastructure and works like an employee. We started by charging for what you run. Per trace, per eval, per unit of consumption. It made sense on paper, you pay for what you use. In practice it got complicated fast. Every feature had its own meter, so the bill became a matrix you had to model just to predict, and that was true for our customers and for us. A price you cannot forecast is its own kind of cost. So instead of adjusting meters, we asked where our cost actually comes from, and it came down to two things: the managed AI you run, and the data you keep. The managed AI is the model work behind evals, guardrails, simulation, and optimization. We price it as AI credits, on the real cost of those calls, and our own judge keeps that cost low. There is a free allowance every month, and if you would rather not pay us for it at all, bring your own key for the judging and the platform cost is zero. The data is the part that compounds. You run a trace or an eval once, in milliseconds, then keep it for months, indexed and queryable so you can search and cluster it. Compute is spiky; retention is relentless, millions of traces sitting in fast storage. So we price storage on what you keep, traces, spans, and eval results, with the first 50 gigabytes free and the rate per gigabyte dropping the more you store. Two dimensions instead of a meter per feature, both of which you can forecast and control. And since we are open source, self-host the whole stack and you pay us nothing, your data stays on your own infrastructure. It also stays fair as you scale. Charge per event or per seat, the way many tools do, and the bill climbs fastest right when you instrument the most. Here, credits track real work and drop to zero if you bring your own key, and storage tracks only what you choose to keep, with the rate falling as it grows. You are not penalized for watching your whole system. It may not be a perfect proxy. Storage tracks how much you keep, not always how much value you get, and a light user can get a lot from a little. We would rather undercharge them than go back to a bill nobody could predict. A deliberate trade, and probably not the last call we make here. Honestly, I have not seen anyone fully crack agent pricing. If you have found a model that fits how agents actually behave, a cost that scales with compute and a value that scales with labor, I would genuinely like to hear it

Dental Fee Setting Guide for Dentists: Stop Guessing, Price by Procedure. Most dentists aren’t underperforming clinically. They’re underpricing. Not because fees are complicated, but because most fee schedules are inherited, guessed, or anchored to PPOs. The result? Busy schedule. Tired team. Weak margins. The fix is simple, but not easy: stop looking outward first. Start with your numbers. What does it actually cost you to deliver care? Not just lab and supplies. Real cost. Chair time. Team time. Overhead. Your time. If you don’t know your production per hour, you’re not setting fees. You’re guessing. Here’s the reality most miss: Two dentists can charge the same for a crown and have completely different profitability. Same fee. Different systems. That’s why copying competitors doesn’t work. Once you know your numbers, then use the market as a reference. FAIR Health shows what actually happens in claims. NDAS shows what dentists say they charge. Both are useful. Neither should run your practice. Stop thinking in percentiles. Start thinking in buckets: High skill, high time, high liability → price higher Commodity, shoppable → stay competitive Strategic entry points → drive flow and acceptance Example: If your crown is $1,200 and takes 90 minutes, you’re producing ~$800/hour. Is that enough? In many practices, it isn’t. Now compare to market data. If your area supports $1,400–$1,700, you’re not being aggressive. You’re being accurate. Same story with SRP and build-ups. Often underpriced. But not everything should go up. Prophy? It’s a gateway, not just a procedure. Sometimes strategy beats math. Also understand this: Fees are rising slowly. Reimbursements aren’t. Insurance companies have more leverage than dentists. That gap is getting wider. Your UCR is your anchor. Set it low, and you negotiate from weakness. If you’re FFS, especially in a rural market, your pricing power is higher than you think. Patients don’t just buy price. They buy trust, convenience, and clarity. The biggest mistake isn’t high fees. It’s poor communication. So here’s the play: Pull your top 20–30 codes. Know your fee, time, and production per hour. Compare to FAIR Health and NDAS. Look at case acceptance. Adjust line by line. Not across the board. Then watch results for 60–90 days. This isn’t a one-time decision. It’s a system. Review annually. Adjust intentionally. Because this isn’t about charging more. It’s about charging correctly. Are your fees based on real numbers, or just inherited guesses?

Most founders don’t fail because of product or marketing. They fail because they price on instinct instead of intelligence. Gut-feel pricing is the silent killer of good startups. You think you’re being competitive, but you’re really bleeding margin. Here’s the truth: Pricing isn’t about guessing what the market will tolerate. It’s about understanding what your value actually creates. ▪️Step 1: Know your real costs. Not just what’s on the invoice but the hidden ones. Subscriptions, support hours, delivery errors, discounts that compound. If you’re not tracking every cost, you’re not pricing, you’re gambling. ▪️Step 2: Ditch the “cheap = competitive” trap. You don’t win by being the lowest price in the room. You win by being the clearest about the value you deliver. If your product saves a client $40, charging $30 isn’t greed, it’s good economics. ▪️Step 3: Treat pricing as a living system. The best founders iterate on pricing like they iterate on product. They test, collect data, and evolve fast. Your pricing strategy isn’t a number, it’s a signal. It tells the market what you believe your value is worth. So ask yourself: Is your pricing a reflection of confidence — or convenience? P.S. Dropping impactful insights that matter in my weekly newsletter every Saturday, 10 AM EST. Don't miss it. Subscribe right here! https://lnkd.in/gcqfGeK4