Pricing Strategies : Cost plus 1.3.3

Cost-plus pricing - Price is set by applying a percentage margin based on the unit costs of production or supply.

Mark up - the amount added to the cost price of goods to cover overheads and profit.

If a business wants to operate profitably, then by definition it's pricing must take some account of the costs of production or operation.

▪ Cost is an important influence on pricing

▪ Overtime a price must be more than the related costs in order to make a profit

▪ Popular method of cost-based pricing is "mark-up" - widely used in retailing.

An example of basing price using a mark-up approach would be:

Total costs for producing 10,000 units
= £100,000
Cost per Unit = £10
Add mark up 100% of cost = £10
Selling price = cost + mark up = £20

ADVANTAGES

1) Easy to calculate

2) Price increases can be justified when costs rise

3) Managers can be confident each product is being sold at a profit

DISADVANTAGES

1) Ignores price elasticity of demand

2) May not take account of competition

3) Profit is lost if price is set below the level that customers are prepared to pay.

4) Sales are lost if price is set above the price customers are willing to pay.

5) Business has less incentive to control costs.