Cost-Plus Pricing

The easiest pricing method is cost-plus pricing-adding up a standard mark-up to the cost of the product. Construction companies, for instance, submit job bids by estimating the whole project cost and adding a standard mark-up for profit. Accountants, Lawyers and other professionals normally price by adding up a standard mark-up to their costs. Some sellers tell their customers they will charge cost plus a particular mark-up; for instance, aerospace companies price this way to the government. To demonstrate mark-up pricing, imagine any manufacturer had the following costs and expected sales: Then the manufacturer's cost per toaster is given by following:

Unit Cost = variable Cost + Fixed Cost

Price - Variable Cost

The manufacturer's mark-up price is given by following:

Mark-up Price =  Unit Cost

 (1-desired return on sale)

Do utilizing standard mark-ups to set prices make sense? In general, no. Any pricing method that avoids demand and competitor prices is not possible to lead to the best price. Mark-up pricing works only if that price in fact brings in the expected level of sales. Still, mark-up pricing remains famous for many reasons. Primary, sellers are surer about costs than about demand. By tying the price to cost, sellers make simpler pricing-they do not have to make numerous adjustments as demand changes. Second, while all firms in the industry utilize this pricing method, prices tend to be a similar and price competition is minimized. Third, various people feel that cost-plus pricing is fairer to buyers and sellers both. Sellers earn a fair return on their investment but don't take advantage of buyers while buyers' demand becomes great.