What is cost-plus pricing?
Cost-plus pricing is the simplest pricing method — it involves adding a fixed markup or margin to the cost of producing or purchasing a product. The company calculates total cost, then adds the profit percentage it wants to achieve.
This approach is intuitive, easy to implement and guarantees that every unit sold generates the assumed profit — as long as sales volume is sufficient.
Formulas
Two ways to calculate
Markup-based
Price = Cost × (1 + markup%)
Margin-based
Price = Cost ÷ (1 − margin%)
Worked example
An office chair manufacturer has the following unit costs:
Price calculation
When to use cost-plus pricing?
- Manufacturing & retail — when costs are well-known and stable
- Government contracts & tenders — where transparent calculation is required
- Commodity products — where value differentiation is difficult
- Startups — as a starting point before more advanced strategy
- Project services — combined with T&M (time × rate + costs)
✓ Pros
- Very simple to calculate
- Guarantees cost coverage
- Easy to justify to clients
- Predictable profit per unit
- Widely accepted in tenders
✗ Cons
- Ignores customer value
- Doesn't account for competitor prices
- Can lead to over/underpricing
- No incentive to reduce costs
- Doesn't react to demand changes
Common mistakes
Ignoring indirect costs. Many businesses only count direct costs (materials, labour) and forget overhead — rent, administration, depreciation. This leads to systematic underpricing.
Confusing margin and markup. A 30% margin is not the same as a 30% markup. On a $100 cost — a 30% margin gives a price of $142.86, while a 30% markup gives $130. The difference is nearly 10%.
Calculate your price with cost-plus
Use the margin & markup calculator — enter cost and desired margin.