What Is Cost Plus Pricing ?
Cost plus pricing (also known as markup pricing) is a most popular and widely used pricing technique in which selling price of product or service is determined by adding desired margin (also called markup) to the unit cost of a product. In this method, selling price of the product can be easily calculated by using following formula:
Selling Price = Cost Of Product + Markup
Suppose, per unit cost of is $20 and a company wants 20% profit margin, then selling price of the product will be $24.
In this post we are going to discuss some of the major pros and cons of cost plus pricing method.
Advantages Of Cost Plus Pricing
The main advantages of cost plus pricing strategy can be highlighted as follows:
1. Easy To Determine
It is very easy to calculate selling price of a product or service by using this method. Price can be calculated just by adding markup or desired profit margin to the per unit cost. So, it can be used by anyone having little mathematical knowledge.
2. Cost And Time Saving
Cost plus pricing is simple method and it does not require market research and analysis. It can be determined simply by adding certain percentage of margin to the product cost. So, it saves cost, time and resources of the company.
3. Consistent Rate Of Return
Another advantage of cost plus pricing is that it ensures consistent return. It covers all production and marketing related costs and makes desired profit.
4. Transparency
Cost-plus pricing provides cost transparency that helps to increase customer trust. Because customers believe that company is charging fair price for the product.
5. Discourage Over Or Under-pricing
As we know that price of the product is determined by adding some extra charge to the product's unit cost, markup can be adjusted as per the market situation and company's desired return. So, it lowers the possibility of overpricing or underpricing of the product/service.
Also Read
Meaning and objectives of price discrimination
Meaning and objectives of price skimming
Meaning and objectives of penetration pricing
Advantages and disadvantages of competitive pricing
6. Flexible Method
Cost plus pricing is more flexible than other pricing strategies. Firms may modify the markup according to the change in the cost of production, market condition or other business factors.
Disadvantages Of Cost Plus Pricing
The main limitations or disadvantages of cost plus pricing method can be highlighted as follows:
1. It gives emphasize on maximizing profit and ignores customers' preferences, wants, willingness to pay etc.
2. Cost plus pricing may lead to overpricing or underpricing because it completely ignores consumer demand .
3. It limits the profit, so a company may fail to maximize revenue.
4. It ignores rivals in the market and their pricing strategy.
Pros And Cons Of Cost Plus Pricing In Brief
Pros
* It simple and time saving strategy
* It is more reliable than other pricing methods
* It provides consistent rate of return
* It minimizes the chance of over or underpricing
Cons
* It does not consider market demand and pricing policy of rivals in the market
* Firms may not gain competitive advantage by adopting this method
* It may lower the efficiency and firms may miss earning opportunity
