Every number an organisation circulates internally becomes an argument someone is entitled to make. The cost floor is the most dangerous of these, because the argument it enables always points downward.
Three things can anchor a price: what the offer costs you to produce, what competitors charge, or the value the buyer will be able to book. Most organisations believe they price on the third and in practice price on the first. The gap is rarely visible from the executive floor. It shows up in the arithmetic of individual deals, which nobody reviews in aggregate, and in a margin line that drifts across several years without any single decision anyone could point to.
Underneath sits a second question that matters more. Whatever the anchor is, someone inside the organisation has to see the number doing the anchoring. Who that someone is turns out to be a decision-rights question: who may see the figure, who must not, and what argument each becomes able to make once they can. Costing, on that reading, is not an accounting exercise but a control one.
The Strategic Context
Cost-plus pricing survives because it is defensible. Every number traces, the margin percentage is set by policy, and a manager applying it correctly cannot be accused of arbitrariness. It also produces prices that are arbitrary in a specific sense: they encode what your production system happens to cost this year and say nothing about what the offer is worth to the buyer.
The consequences run past any single deal. An enterprise pricing off its own costs has structurally chosen to compete on price, because cost reduction is the only lever it has left — and it made that choice without ever discussing it as strategy. Competing on cost is a legitimate position, but it demands a particular operating model, capital profile and tolerance for volume risk. Organisations that drift into it rarely build any of those, because they never noticed they had chosen.
The reverse case is more common than executives assume. An enterprise whose costs happen to be low will systematically underprice offers creating substantial value and never know it, because the margin percentage looks healthy. A comfortable percentage on a small base is a small number. This is the least visible form of value leakage in a commercial organisation, and it never reaches a variance report.
The Assumption That Costing and Pricing Are the Same Discipline
The first misreading is that knowing your costs is the beginning of pricing. It is the beginning of solvency. Costing establishes the floor below which a transaction destroys value, and that floor is essential: an organisation that cannot state its true unit cost cannot tell a good deal from a bad one, evaluate mix, or know which parts of its portfolio subsidise others. The error is not in calculating the number but in treating it as the base from which price is built upward.
The second misreading treats value-based pricing as a communication technique — price set on cost, then explained in the language of value. Buyers detect this quickly, because a price built on cost moves when cost moves and a price built on value does not. A supplier whose prices track their own input costs has told the buyer what the anchor is without saying anything.
The third misreading is the one this article exists to correct: that the cost number is neutral management information, shared with whoever needs it to work well. It is the premise of a specific argument, and everyone holding it eventually makes that argument, because it is available, quantified and internally defensible.
Reframing the Issue
Reframe pricing as the division of a jointly created surplus. Your offer, if it works, produces a quantum of value inside the buyer's business, and the price determines how that quantum is split. Setting price as a share of created value means asking what fraction you retain and what fraction you pass through — a question with a defensible answer that has nothing to do with your cost structure.
That changes what the organisation needs to know. Under cost-plus the essential internal number is unit cost; under value-share it is the quantified benefit to the buyer, and unit cost recedes to a floor and a portfolio input, consulted by those who manage the portfolio.
It also changes what discipline is required. A share of value can only be claimed if the value can be stated, and stating it is analytical work belonging upstream — research conducted before the offer is designed rather than after it is priced. Whether the value you quantify is distinctive, or simply what any competent competitor also delivers, is a prior question most organisations answer far too generously about themselves [Related article: Which of Your Strengths Are Competitive, and Which Are Merely Common?].
What the Buyer Can Actually Book
Not all value is priceable, and the distinction is sharper than most commercial teams allow. Value the buyer can book shows up in their own numbers, attributable to a named line, owned by a person on their side who will be asked about it. Value that cannot be booked — pleasant, real, genuinely delivered — will not carry a price, because the buyer cannot defend it internally when the invoice is questioned.
Several dimensions can be quantified in principle: revenue the buyer gains, cost or labour they avoid, throughput they add, risk they reduce, working capital they release, obligations they discharge. To become a price anchor, each must survive three tests. Can it be measured with data the buyer already holds? Will someone on their side put their name to the estimate? Will it still be visible at renewal?
Consider a purely hypothetical illustration, constructed to make the arithmetic visible rather than to represent any real case. A component supplier delivers a change removing a hypothetical two hours of rework per production shift. If the buyer can attribute that recovered time to a measured cost line, the value is bookable and forms a legitimate base for a share. If the time is absorbed into general capacity and never measured, the value is real and the price anchor is not. A supplier unable to tell the two situations apart will quantify confidently, meet a discount request, and conclude that value-based pricing does not work.
This is also where value quantification meets its structural constraint. A quantified value argument must reach someone whose mandate includes the outcome being valued. Presented to someone whose mandate is unit price, it is not an argument — it is a longer document ahead of the same conversation [Related article: Who Can Say No — and Does Your Commercial Motion Ever Reach Them?].
The Cost Floor Is a Decision Right, Not a Secret
Withholding the cost floor is usually framed as confidentiality, which invites an obvious objection: secrecy inside a firm corrodes trust, and a sales force that cannot see its own economics cannot shape a deal intelligently. The objection is sound, and it defeats the confidentiality framing entirely.
The stronger framing is decision rights. The question is not what people are permitted to know but what argument the organisation intends each role to be equipped to make. A number in someone's hands is a licence to reason from it, and reasoning from a cost floor yields one conclusion every time: this price is still above cost, therefore this concession is acceptable.
That reasoning is not incompetent. It is locally correct and globally destructive. Take a second clearly hypothetical illustration: unit cost 40, list price 100. A manager who can see the 40 does not experience a price of 62 as forfeiting more than a third of the margin. They experience it as a healthy gross margin on a deal that would otherwise be lost, and can defend it in those terms to anyone who asks. Repeat across a hundred deals and two reporting periods and the organisation has re-based its price without a decision, a paper or a meeting.
The buyer-side version is better understood and works identically. A buyer who learns your cost structure anchors to it and negotiates margin percentage rather than value share — a frame in which you can only lose, because your costs are a fact about you and the value created is a fact about them.
Why the Erosion Is Invisible Until It Is Structural
Three properties make this the hardest kind of decline for a board to detect.
It is gradual, and each step is defensible. No individual concession is wrong on the reasoning available to the person making it, and there is no misconduct to find and no policy breach to cite — which is why investigations after the fact yield nothing.
It is masked by percentage reporting. Gross margin percentage can hold steady while absolute margin per transaction falls, if mix moves toward smaller work — and percentage is what most boards receive. The number that would expose the drift, realised price against value quantified at the time of sale, is rarely calculated, because the second half was never recorded.
And it is self-reinforcing through expectations. Buyers who received a concession last year plan around it this year, and their budgeting makes the lower number the reference point. Recovery requires them to explain an increase internally — a harder conversation than the one that produced the concession. This is why a discount request is better read as a diagnostic signal about competitive position than as a negotiating move [Related article: What a Discount Request Is Actually Reporting].
Decision Framework
The instrument is an explicit allocation of numbers to roles. Decide it once, deliberately, and record the reasoning.
| Role | Sees | Does not see | Argument this enables |
|---|---|---|---|
| Board and executive | Cost floor, value model, realised price against quantified value | — | Whether the enterprise captures a fair share of what it creates |
| Finance and pricing | Cost floor, full margin structure, concession history | — | Where the floor sits, and where the portfolio subsidises itself |
| Commercial and sales | Value model, price bands, concession authority, deal margin contribution | Unit cost floor | What the buyer will book, and what may be conceded on what evidence |
| Delivery and operations | Cost drivers within their control | Price and margin by account | Where cost is reducible without degrading the value being sold |
| The buyer | Value model, price, terms | Cost structure, margin | What they gain, and what share of it they pay |
Three tests before adopting it. The substitution test: if the commercial team is not given the cost floor, what number replaces it? Removing a number without supplying a better one produces guesswork, not discipline; the replacement is a value model plus a concession threshold with defined evidence requirements. The traceability test: for the last twenty significant deals, can you retrieve both the value quantified at the time and the price realised? If not, the anchor is undocumented and the drift unmeasurable. The floor-integrity test: who may approve a price below the floor, and how often has it happened without their knowledge?
From Strategy to Execution
Immediately, establish the two numbers that must exist before anything else is decided: a defensible unit cost floor, and a written value model for each material offer. Most organisations hold the first in some form and lack the second entirely. The value model need not be sophisticated; it needs to name the buyer's measurable line, the estimate, and the assumption behind it.
Over the next several quarters, build the recording discipline. Capture quantified value at the point of sale alongside price realised, so the ratio between them becomes visible. Then rework concession authority so approvals are argued on value evidence rather than distance above cost — which requires that distance above cost is not the number in front of the approver.
Over the longer term, the change is to capability rather than policy. Quantifying what a buyer will book is a research and analysis skill, closer to consulting than selling, and organisations that have never staffed it cannot simply mandate it. The corollary for reward design is uncomfortable: incentives paid on revenue defeat any pricing policy, because they pay for the concession that closes the deal. Reward on realised share of quantified value and the policy stops needing enforcement.
Signals to Monitor
- Realised price as a proportion of quantified value, by offer and segment. The most informative pricing metric an enterprise can construct, and among the rarest.
- Whether price changes correlate with your input costs. Correlation means you price on cost, whatever the policy says.
- Absolute margin per transaction alongside margin percentage. Divergence is the earliest visible sign of mix-masked erosion.
- How many people can retrieve the unit cost floor, and whether that population grew without a decision.
- Proposals carrying a value estimate a named person on the buyer's side has confirmed. Unconfirmed estimates are assertions, and price accordingly.
Questions for the Leadership Team
- For our three largest offers, can we state the monetary value the buyer books — and can the buyer state it?
- Who can currently retrieve our unit cost floor, and did anyone decide that list?
- Comparing price realised against value quantified over three years, is the ratio rising or falling — and can we run the comparison at all?
- Are concession approvals argued on value evidence or on distance above cost, and which number sits on the approval form?
- What do we reward: revenue closed, or share of created value captured?
- If our input costs fell ten per cent tomorrow, would our prices follow — and if so, what is our pricing policy actually describing?
Closing Perspective
An organisation that prices on cost has outsourced its most consequential commercial decision to its own production system. An organisation that circulates its cost floor freely has pre-decided every concession argument in the buyer's favour. Neither is a failure of intent. Both follow predictably from allowing a number to travel further than the decision it was meant to inform.
The remedy is unglamorous and largely administrative: decide who holds which figure, require value to be quantified before price is set, record both, and pay people for the ratio between them. What it protects is not a margin percentage but the enterprise's claim on the value it creates — a claim that, once conceded quietly across several years, is recovered only by asking every buyer to explain internally why they are now paying more.
About the author
Kevin Jogin is Founder & Principal Advisor at EraNorth. Meet the Founder.