Cost Plus (Price Setting)

The Cost Plus pricing strategy calculates a product's selling price by adding a markup to its production cost, covering materials, labor, and overhead. This method ensures all costs are covered and a profit margin is achieved, making it popular in manufacturing, construction, and services for its simplicity and predictability.

Calculations

The Cost Plus strategy is calculated in one of the following ways:

• Price = Cost + Plus // absolute margin based – adding fixed amount of money to the cost

• Price = Cost * ( 1 + Plus% ) // percentage based – adding percentage amount (based on the cost) to the cost. The Cost represents 100% and we add on top of it.

• Price = Cost / ( 1 - Plus% ) // selling price based – adding percentage amount (based on the price) to the cost. The Price represents 100% and the Plus % is a percentage of that Price.

where:

• Cost (of the product) – Money value including currency.

  • Will be available in the price list/grid in the Cost field.

  • Is stored in a Product Extension table.

  • Is part of the Core PSP module (see PSP Cost Element).

• Plus (for the product) – Can be either percentage or absolute value.

  • Is stored in a Company Parameter tables “CostPlus” per Pricing Level and defined for a combination of Product Segments (see also Cost Plus Lookup).

• Price

  • The calculated result will be available in the price list/grid in the Final Price field.

Use Case Examples

Here are a few use cases for Cost Plus pricing strategy:

• Traditional wholesale distribution model – The Cost Plus pricing strategy can be used here to add a fixed or variable markup to the product cost to determine the selling price. This pricing strategy works well when the distributor wants to maintain a fixed profit margin regardless of the price changes in the market.

• Manufacturing industry – The Cost Plus pricing strategy is commonly used when products are manufactured to order, and the costs are variable based on the production quantity. The Cost Plus markup can be used to calculate the final selling price and ensure the desired profit margin. This pricing strategy can also help to manage inventory costs, as it considers the variable production costs.

• Service-based businesses – In service-based businesses such as consulting, legal, or accounting firms, the Cost Plus pricing strategy can be used to calculate the price of services based on the direct and indirect costs incurred in providing the service. The markup could be a fixed percentage or a fixed dollar amount.

• Retail industry – In a highly competitive retail industry, the Cost Plus pricing strategy can be used to calculate the selling price based on the direct and indirect costs, and the retailer's desired profit margin. This pricing strategy allows retailers to remain competitive in the market while maintaining a healthy profit margin.

Overall, the Cost Plus pricing strategy is suitable for businesses that require a straightforward pricing approach that ensures a desired profit margin while accounting for the product cost. It is a flexible pricing strategy that can be customized to suit various industries and business models.