cost-plus pricing – a pricing strategy in which a specific percentage is added on top of the total cost of the product to create the sales price; cost plus percentage
Note: The percentage added to the total cost of the product is known as a markup.
To remember what cost-plus pricing is use the following mnemonic:
The cost to make it, plus the markup, resulted in the final price (cost-plus pricing).
Cost-plus pricing is a strategy where the selling price of a product is determined by adding a specific fixed percentage (a “markup”) to the product’s unit cost. Essentially, the markup percentage is a method of generating a particular desired rate of return. An alternative pricing method is value-based pricing, which takes into account what the customer believes the product is worth.
An example of cost-plus pricing is:
A product costs a total of £10 to produce, including fixed and variable costs.
The markup percentage is 20%.
The selling price is therefore £12.
A £2 profit is made on each product sold.
Cost-plus pricing is a simple and easy-to-use pricing strategy, but it has some drawbacks. One drawback is that it does not take into account demand for the product. If demand is high, the business could charge a higher price without losing sales. Another drawback is that it does not take into account competition. If competitors are charging lower prices, the business may not be able to sell its products at a cost-plus price.