What is “Cost-Plus Pricing”?

Cost-plus pricing is a straightforward pricing strategy used by businesses where the selling price of a product is determined by adding a fixed markup to the cost of production.

This strategy ensures that all costs are covered and a profit margin is secured. It is widely used in industries with stable production costs, such as manufacturing, where variable costs are easier to track and calculate.

Example

"The company set the price for the new product by using a cost-plus pricing strategy, adding a 20% markup to the total cost of production."

How is “Cost-Plus Pricing” Used in Business?

Cost-plus pricing is often employed by businesses in sectors where production costs are predictable, and there’s a need to ensure profitability. It is particularly useful in situations where competition doesn’t heavily influence price setting or where cost transparency is key. While easy to implement, it may not always reflect market demand or competitive pricing dynamics, so businesses should evaluate its suitability regularly.

Pro Tip

Although cost-plus pricing is simple, it doesn’t account for consumer willingness to pay or market trends. Be mindful of potential competitive pressures and market fluctuations that could impact sales.

Related Terms

Value-Based Pricing, Penetration Pricing, Break-Even Analysis, Dynamic Pricing