When you produce a product, it costs your company a certain amount of money.
When it comes to pricing, this “cost” serves as an anchor point for most pricing strategies. Because it costs money to produce a product, retailers and brands, understandably, want to have an end price that is more than that cost. If the end purchase price is lower than it costs to produce a product, the retailer or brand will lose money every time they sell that product.
This is where cost-oriented pricing comes into play, most notably a cost plus pricing strategy. In this article, we’ll cover cost plus pricing meaning, explore how it works in practice, and show you when it makes sense to use this strategy – and when you should combine it with more advanced, market-based pricing methods.
Cost Plus Pricing Meaning: The Basics
Before diving into formulas and examples, it’s helpful to understand the basic meaning of cost plus pricing. In its simplest form, cost plus pricing means that you take the total cost of a product and add a “plus” – a markup – on top. That “plus” is what generates your profit.
This makes cost plus pricing one of the most intuitive ways to set prices. It answers a straightforward internal question: “What does it cost us, and how much do we want to earn on top of that?” For many retailers, especially those working with private labels or unique assortments, this is a natural starting point.
What Is Cost Plus Pricing?
Cost plus pricing is the most straightforward pricing strategy out there. Sometimes called a variable cost pricing strategy, variable cost pricing model, or even full cost pricing, this price method guarantees that you never lose money in a sale.
Cost based pricing is the foundation for any smart pricing strategy, and is both easy to calculate and apply to your assortment. There are only three steps involved in the cost plus pricing formula: determine how much it costs to produce a product, determine how much margin you want to make (also called the “markup,” meaning how much you mark the price up above the costs), then calculate the final price by combining these two figures.
“Markup” another word for the amount that you add onto the cost of a product in order to achieve your desired margin. Markups are expressed in percentages and currency amounts.
Cost Based Pricing As A Foundation
From a strategic perspective, cost based pricing meaning goes beyond a simple calculation. It offers a financial “floor” that you can always fall back on. Even if you later layer competitive pricing, elasticity, or promotional rules on top, cost plus pricing tells you the lowest sensible price at which you can sell a product while still protecting your margin.
That’s why many retailers use cost plus pricing as a starting point in their pricing engines: first define cost and desired markup, then let other rules decide how far you can move up (to capture more margin) or down (to stay competitive) within that safe band.
How To Calculate Markup Percentages
Markup percentage is the percent amount that you add to the price for markup. To calculate a markup percentage, there is a markup percentage formula. All you need to do is subtract the cost of the product from the end price. Divide that number by the cost of the product, and multiply the result by 100 to find the markup percentage.
The retail markup calculation, also called markup pricing formula
Markup Versus Margin: Why The Difference Matters
In day-to-day conversations, markup and margin are sometimes used interchangeably, but they are not the same. Markup is calculated over cost, while margin is calculated over the end price. If you misunderstand this distinction, you might think you are working with a 40% margin while you are in fact only applying a 40% markup, which results in a lower true margin.
Understanding this difference is a crucial part of cost plus pricing meaning in financial planning and reporting. Pricing teams, controllers, and category managers should always be aligned on whether they are talking about markup or margin percentages.
Talk to one of our consultants about dynamic pricing.
Pros And Cons Of A Cost Plus Pricing Strategy
The biggest pro of a cost plus pricing strategy is that it’s simple: just calculate your costs per unit, decide how much margin you want to make and calculate a price based on this information. That simplicity makes cost plus especially attractive for teams that don’t yet have a lot of data, or that work with complex cost structures and want an easy way to make sure that they cover those costs.
However, this simplicity means that cost plus has a few major disadvantages in the world of variable pricing.
Internal Versus External Focus
To start, it only considers internal variables in calculating a price, but doesn’t account for larger market influences in the pricing equation. Imagine you are selling a hair dryer, which costs you €10 to make. Say you want to make a 50% margin, in which case you’d add a €5 markup to the item on the market.
This is a great strategy, and you’re guaranteed to always make that €5 with every sale. But if you looked at other products on the market, you may discover that you can raise that price a little more. Below are the first two results that appear when searching for a hair dryer. The first is from Philips and is listed at €22.49 at MediaMarkt. The second is from Hema, and is listed at €20.
Even if you want to be the lowest price out of these three hair dryers, you’re still missing out on margin by only pricing yourself at €15.
Example: Cost Plus Pricing Meaning In A Competitive Category
In this hair dryer example, the meaning of cost plus pricing becomes very concrete. If your cost is €10 and you apply a simple 50% markup, you land on €15. That is profitable — you never sell at a loss — but from a strategic perspective you are underpricing yourself compared to the market and leaving room that competitors capture instead of you.
In practice, many retailers discover that a pure cost plus pricing strategy is too “blind” to competitive context. That’s why they increasingly combine cost plus pricing as an internal baseline with competitive data, so they can still secure minimum margins without missing out on potential extra profit.
Related: Price: The Most Important P in the Marketing Mix
Limited Flexibility In A Dynamic Market
The second major disadvantage to cost-plus pricing is that it isn’t flexible enough to keep up with the current dynamic market (especially if you are selling on Amazon or other fast-paced market places). If you only use cost-plus, your prices will never change with market dynamics. So, if the two hair dryers in the above example drop price unexpectedly, you may accidentally end up as the highest-priced option on the market, which can damage your price perception and lead to a reduced number of sales. Cost plus pricing also makes digital investments in things like electronic shelf labels, dynamic pricing, and pricing data like Pricewatch useless.
Ignoring Strategic Loss Leaders
Finally, a cost plus pricing strategy doesn’t account for the times where you may want to sell items at a loss. Some examples of these kinds of strategies include end-of-season sales, clearance sales, Black Friday sales, penetration pricing strategies, or even times when a global pandemic fundamentally alters retail.
Related: How the Coronavirus will Affect Retail
Cost Plus Pricing Meaning In Different Industries
Not every retailer or brand experiences cost plus pricing in the same way. In some industries, costs are stable and products are harder to compare, so cost based pricing fits reasonably well. In others, competition is intense and prices are transparent, making a pure cost plus model risky.
Industries Where Cost Plus Pricing Works Well
- Manufacturing and wholesale, where internal cost structures dominate and customer prices are often negotiated.
- Private label or own-brand assortments, where direct comparability is limited.
- Highly regulated markets, where margins or end prices are constrained.
- Specialist B2B segments, where long-term contracts and predictable margins matter more than daily price moves.
Industries Where Cost Plus Pricing Is Too Limited
- Consumer electronics, where prices move fast and comparison sites make every euro visible.
- Fashion and seasonal categories, with strong markdown cycles and fast-changing demand.
- DIY and home improvement, where big brands and private labels compete closely.
- Marketplaces such as Amazon and Bol.com, where algorithms reward responsive pricing.
What To Think About When Using A Cost Plus Pricing Strategy
When you consider the cons of a cost plus pricing strategy, it’s easy to see why we at Omnia don’t advise cost-plus as the only strategy you use. Determining markup varies from retailer to retailer and category to category. There’s no standard markup pricing, and there isn’t any sort of markup pricing “formula” that can fit every retailer’s needs.
Instead, retailers and brands need to think about markup within the context of their market. There are two main considerations: stock rotation and strategic positioning.
Stock Rotation
Let’s start with stock rotation. If you are in an industry that has fast stock rotation, you can get away with having lower margins on the products you sell. This is because you’ll sell a high volume of these products, meaning you’ll still make profit even if there isn’t a high margin.
If you produce or sell a slow moving product though, you’ll need to think about your markup differently: because you won’t sell a high volume of products (and because your products will take up valuable shelf or warehouse space for longer periods of time), you need to recoup the loss with a high margin. This is why luxury goods — like a timeless Rolex — come with high prices.
You’ll have to think about where your products sit on this spectrum when determining your markup.
Strategic Positioning
Beyond thinking about stock rotation though, you also have to think about the product’s strategic positioning. In some cases, you may want to sell a product at a LOSS instead of a gain, in which case the cost-plus pricing strategy may not be relevant for you.
“Diapers are a great example of this strategic loss,” says Sander Roose, CEO of Omnia. “It’s well known within retail that diapers are not a profitable product. But smart retailers use this knowledge strategically. In many cases, they may run a sort of high runner strategy and sell the diapers at a loss, but with the ultimate goal of pulling families into the online shop. These families have bigger budgets, so retailers can easily make up for the loss on the diaper with other products.”
Cost Plus Pricing Meaning As A Price Floor
One powerful way to use cost plus pricing in a modern setup is not as a final price, but as a price floor. In other words: you calculate a minimum acceptable price using cost plus pricing, and then let a dynamic pricing engine move up and down within safe limits based on competitors, demand, and strategy.
In that context, cost plus pricing meaning shifts from “this is the price we always charge” to “this is the lowest price we are prepared to accept while still protecting margin.” Everything above that can then be optimized using smarter rules and external data.
When To Use A Cost Plus Pricing Strategy
“I think a cost-plus pricing strategy makes sense for non-comparable products or own-brand products,” comments Sander. “If you can’t compare your product to anything in the market, or don’t have price elasticity data, then you can use cost plus to arrive at sensible prices for your products.”
A cost plus strategy may also be good as a fallback strategy or a “last resort” pricing strategy within your dynamic pricing engine. Cost oriented pricing can be an effective way to figure out the pricing floor for your dynamic pricing strategy. When you account for a certain amount of margin as your lowest price, you can still ensure that all sales will be profitable.
Practical Triggers For Cost Plus Pricing
- You launch a new private label line with limited competitor data.
- You enter a new country where you don’t yet have strong pricing benchmarks.
- You want to guarantee minimum profit on every SKU before adding competitive rules.
- You need a transparent and auditable method for setting internal transfer prices.
Final Thoughts
The cost plus model pricing is easy to apply to your assortment, but it does have a few major disadvantages. That said, it’s a great starting point that you should use as your price floor in any dynamic pricing strategy you create.
For many retailers, the real power lies in combining the cost plus pricing meaning — a clear link between cost and profit — with data-driven pricing techniques that look outward to the market. Cost-based pricing ensures you don’t erode your margins; dynamic and competitive pricing makes sure you don’t erode your position in the market.
Curious about other pricing strategies? Check out our series of different strategies, all linked below.
What is Value Based Pricing?: A full overview of how price and consumer perception work together.
What is Charm Pricing?: A short introduction to a fun pricing method
What is Penetration Pricing?: A guide on how to get noticed when first entering a new market
What is Odd Even Pricing?: An explanation of the psychology behind different numbers in a price.
Here’s What You Need to Know About Psychological Pricing (Plus 3 Strategies to Help You Succeed): Modern day pricing is so much more than a numbers game. When thought about correctly, it’s a powerful way to build your brand and drive more profits.
How to Build a Pricing Strategy: A complete guide on how to build a pricing strategy from Omnia partner Johan Maessen, owner of Commercieel Verbeteren.
Frequently Asked Questions About Cost Plus Pricing
What Is The Meaning Of Cost Plus Pricing?
The meaning of cost plus pricing is simple: you calculate the cost of a product and add a markup to determine the selling price. That markup is the “plus” in cost plus pricing and represents your profit. As long as your markup is positive, you never sell below cost.
What Is The Definition Of Cost Plus Pricing?
The cost plus pricing definition is a pricing strategy in which the selling price is determined by adding a predefined percentage or fixed amount (the markup) to the product’s cost. It is also referred to as markup pricing or cost-based pricing and is widely used as a baseline method for setting prices.
What Does Cost Plus Pricing Mean In Retail?
In retail, cost plus pricing means that prices are primarily based on internal cost structures instead of external factors like competitor prices or consumer demand. This guarantees margin protection but can lead to missed opportunities if the market is willing to pay more, or to lost sales if competitors move their prices down.
How Do You Calculate Cost Plus Pricing?
To calculate cost plus pricing, you use this basic formula:
Selling Price = Cost + Markup
For example, if a product costs €25 and you apply a 40% markup, the markup is €10 and the selling price becomes €35.
Is Cost Plus Pricing The Same As Cost Based Pricing?
Cost plus pricing is a specific form of cost based pricing. Cost based pricing simply means that you use your internal cost as the starting point for setting prices. Cost plus pricing adds the extra rule that you always add a defined markup on top.
When Should Retailers Use Cost Plus Pricing?
Retailers should use cost plus pricing when:
- They sell private label or non-comparable products.
- They lack reliable competitive or elasticity data.
- They need a clear price floor for a dynamic pricing engine.
- They want a transparent internal method for defining minimum prices.
What Are Examples Of Cost Plus Pricing?
Some practical examples of cost plus pricing include:
- A retailer buying a product for €10 and applying a 50% markup to sell it for €15.
- A manufacturer calculating total production cost at €100 and adding 30% markup to sell to wholesalers for €130.
- A private label brand using a standard 60% markup across an entire category to ensure a consistent minimum margin.
Why Can Cost Plus Pricing Be Risky In Competitive Markets?
Cost plus pricing can be risky in competitive markets because it ignores what competitors are doing and how customers respond to price differences. If competitors increase prices and you stay at a low cost-plus level, you lose potential margin. If competitors decrease prices and you stay high, you risk losing volume and damaging your price perception.
How Does Cost Plus Pricing Work With Dynamic Pricing Software?
In dynamic pricing software, cost plus pricing is often used as a guardrail. The cost plus price defines the minimum price (price floor) that the algorithm is allowed to use. Above that floor, the software can optimise prices based on competition, demand, stock levels, and business rules, while still respecting your margin requirements.
Does Cost Plus Pricing Take Psychological Pricing Into Account?
No. Cost plus pricing does not automatically include psychological pricing techniques such as charm pricing (e.g. €19.99 instead of €20) or threshold-based pricing. Those elements must be added on top of cost-based calculations if you want to optimise for consumer perception and conversion.
Should Cost Plus Pricing Be The Only Pricing Strategy You Use?
In most cases, no. Cost plus pricing is a valuable foundation, but it should not be the only strategy you use. The strongest retailers treat cost plus pricing meaning as a baseline to safeguard profitability and then add dynamic, competitive, and value-based pricing layers on top to win in the market.
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