Cost-plus pricing is a pricing strategy where a company determines the selling price of its product or service by adding a markup to the cost of production. The cost includes both variable costs (directly associated with producing each unit) and fixed costs (those that remain constant regardless of the number of units produced).
The formula for Cost-Plus Pricing is:
Selling Price = Cost + (Cost × Markup Percentage)
In this approach, the markup percentage is typically determined based on factors such as desired profit margin, industry standards, or competitive pricing. Cost-Plus Pricing ensures that the company covers its costs and generates a targeted profit on each sale. While it provides a straightforward method for pricing, critics argue that it may not always reflect the true market value of a product or consider customer willingness to pay.