CostBased Pricing
Costbased pricing involves calculating the cost of the product, and then adding a percentage markup to determine price.
Learning Objective

Analyze the use of costplus pricing as a pricing method
Key Points
 Cost based pricing is the easiest way to calculate what a product should be priced at. This appears in two forms: full cost pricing and directcost pricing. Full cost pricing takes into consideration both variable, fixed costs and a % markup. Directcost pricing is variable costs plus a % markup.
 Costplus pricing is a pricing method used by companies to maximize their profits. The firms accomplish their objective of profit maximization by increasing their production until marginal revenue equals marginal cost, and then charging a price which is determined by the demand curve.
 Costplus pricing is used primarily because it is easy to calculate and requires little information.
Terms

rate of return
Rate of return (ROR), also known as return on investment (ROI), rate of profit or sometimes just return, is the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested.

markups
Markup is the difference between the cost of a good or service and its selling price. A markup is added on to the total cost incurred by the producer of a good or service in order to create a profit.

variable cost
the amount of resources used that changes with the change in volume of activity of an organization
Examples
 Costplus pricing is the simplest pricing method used by companies. It is primarily used because it is easy to calculate, requires little information, and allows them to maximize their profits. They first calculate the cost of the product, and then add a percentage markup. This approach sets prices that cover the cost of production and provide enough profitmargin to the firm to earn its target rate of return. This method, although simple, has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price.
 Information on demand and costs is not easily available, and managers have limited knowledge as far as demand and costs are concerned. This additional information is necessary to generate accurate estimates of marginal costs and revenues. However, the process of obtaining this additional information is expensive. Therefore, costplus pricing is often considered the most rational approach in maximizing profits because it relies on arbitrary costs and arbitrary markups.
Full Text
Costplus pricing is the simplest pricing method. A firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This appears in two forms: the first, full cost pricing, takes into consideration both variable and fixed costs and adds a % markup. The other is direct cost pricing, which is variable costs plus a % markup. The latter is only used in periods of high competition as this method usually leads to a loss in the long run.This method, although simple, does not take demand into account, and there is no way of determining if potential customers will purchase the product at the calculated price.
Costplus pricing is a method used by companies to maximize their profits. There are several varieties, but the common thread is that one first calculates the cost of the product, then adds a proportion of it as markup. Basically, this approach sets prices that cover the cost of production and provide enough profit margin to the firm to earn its target rate of return. It is a way for companies to calculate how much profit they will make.
Costplus pricing is used primarily because it is easy to calculate and requires little information, therefore it is useful when information on demand and costs is not easily available. This additional information is necessary to generate accurate estimates of marginal costs and revenues. However, the process of obtaining this additional information is expensive. Therefore, costplus pricing is often considered the most rational approach in maximizing profits. This approach relies on arbitrary costs and arbitrary markups.
Costbased Pricing
Costbased pricing model
Key Term Reference
 Competition
 Appears in these related concepts: Low Success Rate, Case: United States Domestic Automaker, Ford, and Defining international marketing
 Objective
 Appears in these related concepts: The Gallup Poll, Defining Credibility, and Ways of Thinking About Language
 demand
 Appears in these related concepts: Addressing Market Needs, Definition of Price Elasticity of Supply, and Applications of Elasticities
 demand curve
 Appears in these related concepts: Impacts of Supply and Demand on Pricing, Marginal Analysis, and Willingness to Pay and the Demand Curve
 lead
 Appears in these related concepts: Global Marketing and the Internet, Purchase Influences, and Leadership
 loss
 Appears in these related concepts: Elements of economic globalization , Types of Partnerships, and Additional cost and energy saving suggestions for pumps
 manager
 Appears in these related concepts: Choosing the Right Method for the Message, Management Levels: A Hierarchical View, and Technical Skills of Successful Managers
 potential
 Appears in these related concepts: What is Potential Energy?, Conservative and Nonconservative Forces, and Linear Expansion
 price
 Appears in these related concepts: BreakEven Analysis, Terms Used to Describe Price, and Defining a Market System
 process
 Appears in these related concepts: Company Capabilities, A Study of Process, and Parts of a Vertebra
 product
 Appears in these related concepts: Measuring Reaction Rates, Writing Chemical Equations, and Basic Operations
 profits
 Appears in these related concepts: Return on Investment, Three examples, and Local, regional, national, international, and global marketers
 revenue
 Appears in these related concepts: Introduction to the Income Statement, Closing the Cycle, and Fundamental Concepts in Accounting
 revenues
 Appears in these related concepts: Liabilities, Merchant Wholesalers, and Nonprofit Organizations (NPOs)
Sources
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