COST BASE PRICING
Cost base pricing…
Most prominent companies have a pricing policy to sell products and services. It is important to increase sales and profits. When you start a business without a price strategy, it may lead to failure if not a disaster. So, the objective of a price policy is to increase sales. A good price strategy and a business plan will lead to more profits. One of the strategies that help is the cost-based formula. It is a proven pricing strategy to generate revenue.
Cost-based price policy means to set the of a product or service based on the cost. For example, if a product costs $100. Then the business may decide to add 35% of the cost to achieve the selling price. Hence, the selling price for the product is $135. It is a common formula with most businesses. So, this model helps to improve the bottom and it works.
Cost considerations
Cost-based pricing formula must take into consideration all costs. Thus far, it will include the cost of production, manufacturing, and distribution. It is important to include fixed and variable costs to determine the selling price to make a profit. It may be a combination of fixed dollar costs and percentage of costs. A well-calculated price helps the business to differentiate itself from its competitors. In fact, there are two types of cost-based pricing. It may be cost-plus pricing or a break-even pricing formula. So, this pricing is one of a handful of strategies. Thus far, it may be value-based, competition-based, and going rate pricing.
With cost-based pricing, companies implement a formula to make a certain percentage more than the total costs. It is a popular method to calculate prices among most business organisations.
Cost-plus calculation
In cost-plus price calculation, you add a markup to the cost of products or services. So, in essence, it should include manufacturing and distribution costs. It is a simple pricing plan. A fixed percentage or a fixed dollar value is added on top of all costs. It may be on one unit of the product. Hence, it is also known as unit costing. In fact, this pricing plan often ignores consumer demand or competitor prices.
Therefore, to calculate the cost-plus price it is important to add the material, labour, and overhead costs. Then multiply it by 1 plus the markup amount.
Break-even price strategy
The Break-even pricing strategy is also known as target-return pricing. When using this formula, the cost of its manufacturing, production, and distribution determines the price without a markup. Thus far, the strategy uses to determine how many units a company needs to sell to cover all costs. It does not mark up each unit for the purpose of generating income. So, to calculate the break-even prices divide the fixed costs by the price minus the variable cost. So, it means (fixed cost) / (price – variable cost).
In fact, if the business has a specific target profit, then the formula changes a little. It becomes (fixed cost + target profit) / (price – variable cost). So, this formula will calculate how many units need to be sold to make a certain return on investment.
Benefits of cost-bases prices
Both cost-based pricing are popular methods. It is easy to calculate. They both appeal to companies. They are simple to understand too. It simply adds a markup on the total costs. So, regardless of the strategy you use, it covers the production and overhead costs. Hence, it ensures a profit. In fact, cost-based pricing ensures a regular rate of profit. Thus far, it is one of the few pricing strategies that guarantee profits. It is regardless of the industry. So, when you price the goods and services in relation to the costs, you will generate revenue.
