Cost-plus pricing, also known as markup pricing, is a pricing strategy where a predetermined percentage or fixed amount is added to the total cost of a product or service to arrive at its selling price. The total cost encompasses direct materials, direct labor, and overhead expenses. For example, if a product costs $100 to produce and the company applies a 20% markup, the selling price becomes $120.
This method is prevalent because of its simplicity and ease of implementation. It ensures that all costs are covered and a certain profit margin is achieved. Historically, it has been favored in industries with government contracts or limited competition, providing cost transparency and guaranteed returns for the seller. Its straightforward nature minimizes risks associated with fluctuating market conditions.
