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Cost-plus pricing is a pricing strategy by which the selling price of a product is determined by adding a specific fixed percentage (a "markup") to the product's unit cost. Essentially, the markup percentage is a method of generating a particular desired rate of return. [1] [2] An alternative pricing method is value-based pricing. [3]
Cost plus pricing is a cost-based method for setting the prices of goods and services. Under this approach, the direct material cost, direct labor cost, and overhead costs for a product are added up and added to a markup percentage (to create a profit margin) in order to derive the price of the product.
Revenue-oriented pricing: (also known as profit-oriented pricing or cost-based pricing) - where the marketer seeks to maximize the profits (i.e., the surplus income over costs) or simply to cover costs and break even. [3] For example, dynamic pricing (also known as yield management) is a form of revenue oriented pricing.
Value-based price, also called value-optimized pricing or charging what the market will bear, is a market-driven pricing strategy which sets the price of a good or service according to its perceived or estimated value. [1]
Value based pricing is an approach that suggests pricing after the consumers' perception of value. This approach completely reverses the process of pricing in contrast to the cost based pricing approach, and is in fact gaining acceptance as a superior method of pricing. [ 3 ]
Cost Based Pricing Cost-based pricing strategy is based on the seller’s cost. It is product and production cost driven, meaning that the set price covers all the costs of the production and includes a target profit margin . [ 12 ]
The cost breakdown analysis is even more effective when repeated constantly, so that changes in the respective shares in total costs of the various cost drivers can be tracked down. Over a five-year period, the share of expenses for tires might have risen from 5% to 8%, accompanied by a decrease of expenses for personnel from 35% to 32%, which ...
Traditional cost-plus pricing strategy has been impeding the productivity and profitability for a long time. [10] [11] As a new strategy, target costing is replacing traditional cost-plus pricing strategy by maximizing customer satisfaction by accepted level of quality and functionality while minimizing costs.
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