Cost-plus pricing is where you calculate your costs, then add a percentage to it for profits. It is used by most companies.
Cost-plus pricing is required only where you sell customized products/services — where every order is different. For all other products/services — it’s the worst pricing strategy you can use.
In fact — you can lose money using this strategy! How? Two ways:
- Your “fixed” costs are not really fixed. Your component costs can rise dramatically if your unit sales estimates are off (which happens all the time with new products).
- It takes no account of what customers are willing to pay. You could spend years getting 15% profit on a $18-priced product where customers would have been equally happy to pay $19.99. That $2 of extra profit per unit sold might be needed to save your company when the next financial downturn hits.