Cost-plus pricing

Cost-plus pricing is a pricing strategy by which the selling price of a product is determined by adding a specific fixed percentage (a "markup") to the product's unit cost. Essentially, the markup percentage is a method of generating a particular desired rate of return.[1][2] An alternative pricing method is value-based pricing.[3]

Cost-plus pricing has often been used for government contracts (cost-plus contracts), and has been criticized for reducing incentive for suppliers to control direct costs, indirect costs and fixed costs whether related to the production and sale of the product or service or not.

Companies using this strategy need to record their costs in detail to ensure they have a comprehensive understanding of their overall costs.[2] This information is necessary to generate accurate cost estimates.

Cost-plus pricing is especially common for utilities and single-buyer products that are manufactured to the buyer's specification, such as for military procurement.

  1. ^ Kenton, Will. "How Variable Cost-Plus Pricing Works". Investopedia. Retrieved 2021-04-26.
  2. ^ a b Carlson, Rosemary. "Defining and Calculating Cost-Plus Pricing". The Balance Small Business. Retrieved 2021-04-26.
  3. ^ Jain, Sudhir (2006). Managerial Economics. Pearson Education. ISBN 978-81-7758-386-1.