Question

What is cost-based pricing and what are some examples that shows how prices would be determined using this method.

Answer 1

A pricing method in which a fixed sum or a percentage of the total cost is added (as income or profit) to the cost of the productto arrive at its selling price.

Cost Based Pricing Methodology:

The floor and the ceiling prices are determined as shown above. These are the minimum and maximum prices that a seller will demand from the buyer for a specific product or service. They serve as the available price range. Depending on the company and market situation, the price is then determined.

Example (with calculation):

Total cost of product = total variable cost + total variable cost

= $ 200 + $ 50 = $ 250

Profit margin (Markup) = 25%

Selling price = Total cost of product + profit margin

= 250 + 250 (25/100)

= $ 312.5

This $ 312.5 will be price floor. The price ceiling will depend on the competitive status, company’s situation and perceived value of the product. This is how Cost based pricing works in a typical business