Cost-plus pricing is a lot like the romance novel genre, in that it’s widely ridiculed yet tremendously popular. Almost every manager I know will claim they hate pricing based only on costs. Yet cost-plus pricing remains the most widespread pricing method, used to price everything from a bottle of beer in a bar to multibillion-dollar infrastructure projects.
When Cost-Plus Pricing Is a Good Idea
Though out of fashion among pricing experts, it has some benefits.
July 12, 2018
Summary.
Cost-plus pricing is a lot like the romance novel genre, in that it’s widely ridiculed yet tremendously popular. The idea behind cost-plus pricing is straightforward. The seller calculates all costs, fixed and variable, that have been or will be incurred in manufacturing the product, and then applies a markup percentage to these costs to estimate the asking price. Though currently out of fashion among pricing experts (for good reason), there are sometimes strategic and pragmatic reasons to use cost-plus pricing. When implemented with forethought and prudence, cost-plus pricing can lead to powerful differentiation, greater customer trust, reduced risk of price wars, and steady, predictable profits for the company.