method is easy to implement. Calculate your production costs and set your markup percentage. To determine your markup, you should have a basic understanding of the market to be competitive. You don’t want to undervalue your product, leave money on the table, or price yourself out of the market.
Cost control: This [rocomg strategy encourages better cost management practices. Since your COGS impact your price and profit margin, it’ll be in your best interest to identify inefficiencies in the production and procurement of your goods so you can cut back on your production costs to maximize profit.
Price justification: You can justify price increases as labor and production costs go up. Price transparency helps create trust with your audience when you communicate why the price hike is happening.
Disadvantages:
Ignores unique value proposition: The strategy focuses solely on internal costs, ignoring the unique value proposition your product offers. Customers might perceive a lower price — even if it results in a profit — as an indicator of inferior quality, impacting brand perception.
Missed profit opportunities: Cost plus pricing doesn’t concretely america phone number list factor in competitor pricing — it’s a subjective consideration when adding markup. This can lead to underpricing or overpricing of your product, both of which can affect your sales.
3 considerations when using cost plus pricing
Let’s dig a little deeper into some of the other considerations of the cost plus pricing method and when it might be appropriate or not appropriate to use. It’s important to consider these factors:
1. Your line of business
Moderately priced retailers such as clothing or cosmetic companies use a cost plus pricing formula due to their product variety. They can apply different markups to different products based on their production cost.
For example, a cosmetic seller can easily justify different prices for a skincare product like an eye serum versus a tool like a makeup brush based on their production costs.
Tech industries have a harder time with this pricing structure because the overall value they provide is much higher than the cost of production. It can be argued that using a value-based pricing model (explored below) creates a more robust margin for SaaS companies.
2. Shifts in demand
Elastic demand is the relationship between demand and other variables, such as the availability of similar products, advertising pressure, and customer income. If the price increases or decreases, the quantity demanded can change significantly. These shifts make cost plus pricing difficult because even small price increases can lead to a significant drop in sales.
If your product is less elastic, meaning the overall demand is less likely to change due to need, cost plus pricing might work well for your business. Let’s say that your customer data reveals that your customers have a strong commitment to your product and will likely continue to buy even if the price increases. This is evidence that cost plus pricing is a good move for your business. Certain prescription drugs, for instance, are less elastic products — their demand remains high despite price fluctuations.