Cost-Plus Pricing Definition
In cost-plus pricing, businesses set prices by first calculating their costs, then adding a markup percentage on top of those costs. The markup percentage is usually calculated as a percentage of the product’s selling price. For example, if a product costs $100 to produce and the company wants to earn a 20% profit margin on that product, they would set the selling price at $120 ($100 + 20% = $120).
Cost-plus pricing is often used by businesses when they are selling to other businesses, rather than to consumers. That’s because it can be difficult to determine what customers are willing to pay for a product, and cost-plus pricing gives businesses a way to ensure that they are making a profit on each sale.
There are some drawbacks to cost-plus pricing, however. First, it does not take into account demand for the product, which means that prices could be too high or too low. Second, it can encourage companies to cut corners on quality in order to keep costs down and increase profits.
