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3 Examples of Cost-Plus Pricing

Cost-plus pricing is a pricing strategy that sets prices based on costs plus markup. This is done to ensure a profit margin but is typically viewed as a sub-optimal pricing strategy that ignores commercial realities such as market prices, competition, customer perceptions of prices, customer price sensitivity and the value of your products and services to customers. The following are illustrative examples of cost-plus pricing.

Full Cost-plus

Including both unit cost and a share of overhead cost in the price.
Price = unit cost + (overhead/volume) + markup
For example, an ice cream vendor whose cost per ice cream is $1 with overhead costs of $1000 and expected sales volumes of 1000 units who aims to make $1 per sale.
Price = $1 + ($1000/1000) + $1 = $3

Unit Cost-plus

Considering only the unit cost of the product in the price.
Price = unit cost + markup
For example, an ice cream manufacturer with a unit cost of $1 that has set a gross markup of 50%.
Price = $1 + ($1*0.5) = $1.50

Contribution Margin Pricing

A contribution margin is the total dollar amount of gross profit achieved from a unit of sales. For example, a house builder with a target to achieve a $200,000 gross profit from each unit in a housing development who then adds the build cost of each unit to determine a price.
Price = variable cost per unit + contribution margin
In the example above, if unit 1a cost $570,000 to build the price would be calculated as:
Price = $570,000 + $200,000 = $770,000

Pricing Strategy

This is the complete list of articles we have written about pricing strategy.
Algorithmic Pricing
Cost-plus Pricing
Channel Pricing
Loss Leader
Decoy Effect
Price Signal
Dynamic Pricing
Everyday Low Price
Pricing Strategy
High-Low Pricing
Value Pricing
Market Price
Penetration Pricing
Predatory Pricing
Premium Pricing
Price Discrimination
Price Leadership
Price Points
Price Skimming
Price Umbrella
Price War
Pricing Objectives
Subscription Model
Variable Pricing
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