Cost plus pricing explanation

The explanation of cost plus pricing is as follows:

Cost-based pricing is a method to set the product price according to the unit cost of the product plus a certain percentage of profit. That is to say, it is a way to increase some profits on the product cost.

Most enterprises determine the new profit according to the cost profit rate. That is: price = unit cost+unit cost × cost profit rate = unit cost (L+ cost profit rate) Full cost-based pricing is a common pricing method for enterprises.

Another advantage of the pricing method based on the elasticity of demand price to determine the cost plus ratio is that it is based on variable cost compared with the pricing method based on cost. This can avoid the wrong decision that may be made in full cost pricing, and variable cost is the lowest economic boundary of price.

The pricing method of determining the cost plus rate with the elasticity of demand price is also beneficial to enterprises to continuously reduce product costs. In the fierce market competition, the reduction of product cost, on the one hand, can increase the profits of enterprises, on the other hand, enterprises can take the initiative in product prices, thus enhancing their competitiveness in the market.

Advantages of cost-based pricing:

1, the calculation method is simple and the data is easy to obtain.

2, according to the full cost pricing, can ensure that all the costs consumed by enterprises are compensated, under normal circumstances, you can get a certain profit.

3. It is conducive to maintaining price stability. When consumer demand increases, the price of products will not increase according to this method, and the fixed bonus will also enable enterprises to obtain more stable profits.

4. If all enterprises in the same industry adopt full cost plus pricing, as long as the price increase ratio is close, the set price will be close, which can reduce or avoid price competition.

However, completely cost-based pricing is a typical producer-oriented pricing method. Modern market demand is changing rapidly, competition is fierce, and product types are increasing day by day. Only those products that are consumer-centered and constantly meet the needs of consumers can gain a foothold in the market. Therefore, pricing based entirely on cost also has its obvious shortcomings in the market economy.