Cost Plus Pricing Explained
Cost Plus Pricing is a basic repricing strategy and dynamic pricing formula used by businesses to cover costs and ensure a healthy cash flow. Cost plus pricing covers all outgoing expenditures from production costs to sales related costs. This method pretty much guarantees profits while still remaining competitive. Thankfully, the price optimisation formula used for cost plus repricing is really very simple, with little information required.
Cost Plus Pricing Formula
Basically, for dynamic price updating using the cost plus pricing method, you simply need to follow three simple steps:
- Work out your total costs involved for each individual product. This includes everything from production costs, fuel costs, marketing expenditures, packaging costs, marketing costs, staff salaries and raw materials. One you know your total expenditure on a batch of products, you can then divide this amount by the number of units. This gives your unit cost. (Total Costs / Number of Products = Unit Cost)
- Decide on your desired profit margin amount. This amount varies from business to business, but is usually around a 40% to 70% markup. Typically, you might want to reprice your products to allow wholesale customers a lower price with a 40% profit margin, and retail customers a higher price with a 70% profit margin to cover costs. Or, you may want to use our automatic price updating service to adjust your profit margin accordingly depending on competition prices. This is also know as percentage allocation.
- Optimise the price of your final product. Basically, you just need to take your unit cost value and add on your desired percentage allocation from step 1 and 2. For example, if the total costs per toaster that you sell is $10 and your profit margin is 50%, you will need to reprice your end product at $15. (Unit Cost + Profit Margin %)