Calculate optimal product pricing using cost-plus pricing strategy. Factor in product costs, overhead expenses, and desired profit margins to determine the right selling price.
Direct cost to produce or purchase
Indirect costs allocated per unit
Percentage added to total cost
Product pricing is a critical business decision that directly impacts profitability and competitiveness. The right pricing strategy balances covering all costs, generating profit, and remaining attractive to customers. Cost-plus pricing is one of the most straightforward methods, adding a markup to your total costs to determine the selling price.
Product Cost (COGS)
Direct costs to produce or purchase the product including materials, manufacturing, and supplier costs.
Overhead Costs
Indirect business expenses like rent, utilities, salaries, marketing, and administrative costs that should be factored into pricing.
Markup Percentage
The percentage added to total costs to determine selling price. Covers expenses and generates profit.
Profit Margin
The percentage of selling price that represents profit. Different from markup as it's based on selling price, not cost.
Understanding the difference between markup and profit margin is essential for accurate pricing. While both measure profitability, they use different bases for calculation.
Based on cost price:
Markup % = (Selling Price - Cost) / Cost × 100
Example: $100 cost with 25% markup = $125 selling price
Based on selling price:
Margin % = (Selling Price - Cost) / Selling Price × 100
Example: $125 selling price with $100 cost = 20% margin
Important Note
Markup percentages are always higher than profit margin percentages for the same product. A 25% markup equals a 20% profit margin.
The cost-plus pricing method calculates selling price by adding a markup to total costs:
Calculate Total Cost
Total Cost = Product Cost + (Overhead Cost per Unit)
Apply Markup
Selling Price = Total Cost × (1 + Markup %)
Calculate Profit Margin
Profit Margin % = (Selling Price - Total Cost) / Selling Price × 100
Different industries typically use different markup percentages based on their cost structures and market dynamics:
Retail Clothing: 50-100%
High markup to cover inventory and seasonal changes
Grocery: 10-15%
Low markup, high volume business model
Restaurants: 200-300%
High markup to cover labor and overhead
Electronics: 20-40%
Moderate markup with competitive pricing
Jewelry: 100-300%
Very high markup for luxury positioning
Handmade Crafts: 50-150%
Variable markup based on uniqueness
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