Cost-Plus Pricing

Cost-plus pricing is one of the most popular pricing methods, and the simplest.  The logic seems simple: if your business does not have sources of income other than the sale of the product (e.g. subsidy), the price must equal, or exceed, production costs. Production costs include variable costs (which change according to how many units are produced) and fixed costs (costs incurred whether or not any production occurs, such as factory rent). All costs have to be calculated on the basis of a fixed period of time (e.g. on year, half a year).

Examples of variable costs

Examples of fixed costs

  • Raw material
  • Packaging
  • Transport
  • Energy consumption
  • Labor (factory)
  • Rents
  • Regular labor (back-office)
  • Maintenance
  • Interest on loans
  • Depreciation of investments

The unit cost is the cost of producing one unit (e.g. 1 cookstove). It can be calculated using the following (simplified) equation:

Be careful that you are using the same time periods (e.g. sum the production costs for the entire month and divide by the number of units produced that month).

According to the cost-plus method, the price is then calculated by adding a profit margin to the unit cost. Thus:

The profit margin is determined by the manufacturer, who ideally has conducted market research to understand the willingness and ability of the market to pay for the product.

While this method is very easy to calculate, this is not the optimal method for pricing! Click here to learn why cost-plus pricing fails.

End Notes

Nagle, Thomas, John Hogan, and Joseph Zale. The Strategy and Tactics of Pricing: A Guide to Growing More Profitably, 5th edition. Prentiss Hall.