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Cost Plus Pricing: Definition, Method, Formula & Examples

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Instructor: Tara Schofield

Tara received her MBA from Adams State University and is currently working on her DBA from California Southern University. She spent 11 years as a sales and marketing executive. She spent several years with Western Governor's University as a faculty member. Tara has been at Study.com for seven years.

Cost-plus pricing is when a markup is added to the cost of a product. Learn more about the definition of cost-plus pricing, explore the methodology and formulas, and see some examples. Updated: 10/11/2021

What Is Cost-Plus Pricing?

Your company has been developing a new printer that will streamline many processes for your small business customers. Your job is to determine the price of the printer. After doing some research, you determine that the best method for pricing the printer is the cost-plus method.

Cost-plus pricing is a straightforward and simple way to arrive at a sales price by adding a markup to the cost of a product. In our example of the printer, you first have to determine the break-even price, which is the sum of all of the expenses involved in creating a product, including expenses like supplies, production costs, and marketing costs. When you pull all of the expenses together to determine the cost of each printer, you determine that each one will cost $78 to produce. If you sold the printer at $78 your company would break even, meaning there would be no profit or loss.

However, your company definitely plans to earn money from the sale of the printers. In fact, the goal is to earn 25% on each printer. So, you implement the following formula for cost-plus pricing to arrive at the sales price:

Break-even price * profit margin goal

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Examples

Let's walk through the cost-plus pricing formula using our printer example:

  • Break-even price: You determined that the total cost of development, production, and marketing of the product is $78
  • Profit margin goal: Your company wants to make money on the printers at a margin of 25%

Cost-plus pricing = break-even price * profit margin goal

Cost-plus pricing = $78 * 1.25

Cost-plus pricing = $97.50

Using cost-plus pricing, you determine the price of the printer to be $97.50. This allows the company to recoup the cost of producing the printer, while earning a 25% profit margin on each unit sold.

Cost-plus pricing is not only for products, but for services as well. Many companies that provide consulting services rely on cost-plus pricing. For instance, let's say your company offers a repair service for small businesses who own your printers. The repair personnel earn $10/hour, and there are other additional expenses such as supplies, mileage reimbursement, and the cost of the customer service representative who schedules the repairs. If these fees average $4 per service call and the company wants to earn 30% profit on each hour billed for repair services, you can use the same formula to arrive at the cost-plus pricing for the repair service.

  • Break-even price = $10 for repair personnel cost + $4 in supplies, transportation, and customer service = $14
  • Profit margin goal: Your company wants to make a margin of 30% on the repair service

Cost-plus pricing = break-even price * profit margin goal

Cost-plus pricing = $14 * 1.3

Cost-Plus Pricing = $18.20

To achieve the 30% profit margin goal, your company must bill clients at $18.20 per hour.

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