Cost-Plus Pricing: What It Is & When to Use It
As an eCommerce retailer, determining the right pricing strategy can be tricky. To maximize your profit margins, you'll need to find a pricing model that accurately reflects your costs while ensuring you remain competitive with other online retailers. One pricing strategy you may want to consider is cost-plus pricing.
What is cost-plus pricing?
Cost-plus pricing is a straightforward pricing method that calculates the cost of an item and then adds a markup percentage to determine the selling price. The goal of this pricing method is to make a profit on each item sold, while accounting for all of the costs incurred in producing and selling it.
Cost-Plus Pricing Strategy
Cost-Plus Pricing Formula
The formula for cost-plus pricing is simple:
Selling Price = (Total Production Costs + Markup) ÷ Number of Units Sold
The markup percentage varies depending on the retailer's business model, industry, and profit goals. Still, a markup of 20-30% is typical for eCommerce retailers.
Cost-Plus Pricing Example
Imagine an eCommerce retailer selling t-shirts. To determine the selling price with a cost-plus pricing strategy, they would add up all the costs associated with producing the t-shirts, such as the cost of materials, labor, and shipping, to get a total production cost of $10. The retailer would then add a markup percentage of 25%, which results in a selling price of $12.50.
Advantages and Disadvantages of a Cost-Plus Pricing Strategy
- Accuracy: Cost-plus pricing ensures that all costs are accounted for, eliminating the possibility of selling items at a loss.
- Transparency: Cost-plus pricing is easy to understand and communicate, which can help build trust with customers.
- Flexibility: Cost-plus pricing allows for adjusting markup percentages depending on the product and market demand.
- Competition: Cost-plus pricing doesn't take into account the price points of competitors, which can lead to higher pricing than market standards.
- Margin Limits: Cost-plus pricing may not allow retailers to achieve their desired profit margins, particularly if production costs are high.
- Limited Market Advantage: Cost-plus pricing isn't a unique pricing strategy, so it's unlikely to provide a competitive edge in highly saturated markets.