Question

describe the cost-plus pricing method and why marketers use it even if it is not the best method for setting prices?

Answer 1

Cost plus pricing is the easiest form of price determination, and it embodies the basic concept behind doing business. You are making it, selling it for more than you've spent making it (because by supplying the commodity you have added value). Many companies use cost plus pricing when launching goods as their key pricing technique.

Many businesses are estimating their production costs, deciding their target profit margin by pulling a figure out of thin air, rubbing the two figures together and then putting it on a few thousand widgets. It is so easy, really. This approach requires very little market analysis and does not take customer preferences and competitor tactics into account as well.

Cost plus pricing doesn't need any more market study. Production costs are what businesses are mainly aware of by adding up different invoices, labour costs, etc. Businesses should then take the combined costs and apply to them a margin which they believe the consumer can bear. It's pretty easy and for that reason, it's a common strategy among small businesses or businesses where other development aspects have to take precedence.

As long as someone measuring costs per customer or item accurately adds it up, cost plus pricing means that the entire cost of making the product or providing the service is protected, allowing the mark-up to ensure a good return rate. However, there are also other additional expenses that can not be compensated for, resulting in reduced margins. Fortunately, enterprises can create a buffer against uncalculated costs and fluctuations in demand by increasing the arbitrary margin. In addition, as your costs remain inert, you can easily predict revenue for a given month based on history of conversion, marketing expenditure etc.

Cost plus pricing is especially helpful if you don't have details about a customer's ability to pay because there are no direct rivals on the market. Essentially, the only data you need to direct your pricing decision is to quantify or estimate your costs, allowing you to move forward at least a starting point on which to operate as the market and consumer grow.