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Definition

Cost-based pricing

Cost-based pricing involves setting prices based on he costs for producing, distributing, and selling the product plus a fair rate of return for its effort and risk. A company’s costs may be an important element in its pricing strategy.

Cost-based pricing means a pricing method in which the list price is determined by adding a markup percentage to a product’s cost. The markup percentage may be standard for the industry or may be arbitrarily determined by the entrepreneur. The advantage of this method is that is straightforward and it is relatively easy to justify the price of a good or service. The disadvantage is that it is not always easy to estimate what the cost of a product will be. Once a price is set, it is difficult to raise it, even if a company’s costs increase in an unpredicted manner. In addition, cost-based pricing is based on what a company thinks it should receive rather than on what the market thinks a good or service is worth. It is becoming increasingly difficult for companies to dictate prices to their customers, given customers ability to comparison shop on the Internet to find what they believe is the best bargain for them.

 

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