Figuring out the right way to price your products can be tricky. Whether you’re selling software or designer handbags, your pricing strategy has a big impact on your sales success. There are a lot of ways to go about it, but if you’re looking for simplicity, cost-plus pricing might be a good bet. Below, we’ll talk about what cost pricing is, how to use it effectively, and some of the biggest advantages — and potential drawbacks.
What you’ll learn:
What is the cost plus pricing formula?
Advantages and disadvantages of cost plus pricing strategy
Alternative pricing strategies
Three considerations when using cost plus pricing
Get a full visual of your business in an instant
Get complete visibility of your pipeline, forecast, and team — with Revenue Intelligence from Sales Cloud.
Learn more
What is cost plus pricing?
Also known as markup pricing, cost plus pricing is a simple way to america phone number list determine the sales price of a product. In this method, a fixed percentage is added to the total production cost for one product unit, yielding its selling price.
What is the cost plus pricing formula?
Cost plus pricing uses a simple formula: the cost of manufacturing, labor, and overhead (cost of goods sold or COGS) multiplied by one plus your desired profit or markup percentage (in decimal format) to get your selling price. We’ll explain how to figure out your markup next.
Formula: (Total production cost) × (1 + Desired profit) = Selling price
How to determine markup
Sometimes called profit, the markup is a fixed percentage you add to the cost of production (COGS) to determine your selling price. When setting your markup, you should consider how much profit you need to buy additional raw materials for production, what your revenue targets are, and what your competitors are charging for similar products. If your selling price is too high, you could scare off customers. But if it’s too low, you could be leaving money on the table.
Cost plus pricing example
To better understand the cost plus pricing method, let’s look at an example. As a reminder, the formula is:
(Total production cost) × (1 + Desired profit) = Selling price
If your production costs are $50 and you want to achieve a 40% profit margin, your selling price would be $70. $50 x (1 + 0.40) = $70.
Cost plus pricing is one way to price your products and create profit for your business. But don’t make up your mind just yet. There are some pitfalls.
Trending Articles
Productivity icons like email and chat on an illustration of a laptop with a blue background
3 Ways Generative AI Will Help Marketers Connect With Customers
3 min read
Illustrating of Einstein character surrounded by 3 Trailhead badges for AI skills
Learn AI Skills on Trailhead
6 min read
Advantages and disadvantages of cost plus pricing strategy
Cost plus pricing can be a good starting point for setting the cost of your products. However, consider some drawbacks, and be prepared to adjust to market conditions.