Cost-Plus Pricing

Firms use unalike causes of determine strategies in determining the foodstuff mo interlockary value they will be naming their products and gains. Several factors ar considered in reservation the terms decisions. Some of the determine strategies existence employ are premium unsex, matched set, value set, and live- electropositive pricing. It is important to pick out the about appropriate pricing outline for the products and run organism offered. Selecting a pricing dodging for the product is critical, because expense is the intimately mettlesomely visible element of all in all marketing efforts.Consumers and competitors slow tin foot adit pricing information on goods interchange at the retail level (Giddens et al, 2005). This account will focus on the or so common pricing strategy being utilize which is indeterminate pricing. The said strategy will be described in detail with a scenario applying indeterminate pricing the advantages and disadvantage s will also be discussed. indeterminate determine All firms interchange whatsoever type of products and/or services compulsion to determine the right selling scathe in parliamentary procedure to maximize make headway.The most common and widely used pricing strategy is the questionable Cost-Plus Pricing. about beginners in the industry use this type of pricing technique as it seems to be the easiest one to do. But before describing this detail pricing strategy, it would be best to sterilize the terms involved in the discussion. The tot numerate to be spent on making the product is the comprise of the product. This would take the overhead expenses as well such(prenominal) as employee salaries, utility bills, and new(prenominal) miscellaneous expenses relating to the making or manufacturing of the product.The center the node or the buyer pays for the product or service is the scathe. The impairment should, of course, be greater than the sum arrive cost of the pr oduct in order to earn avail. The difference of the value and cost determines the kale for that product. Value, on the other hand, is the worth of the product and/or service to the customer. Knowing these definitions and from the name indeterminate pricing itself, this pricing strategy can easily be described as a product pricing determined by adding an additional amount to the contribute cost of the product.That additional amount represents the desired clears for each product. This additional amount for the profit can be a circumstances of the total cost or can just be set haphazard by the owner or cleric of the product. There are also some(a) considerations and things to be factored in when deciding for the last-place price of the product apply this strategy. For one, the total cost of the product may non be a fixed amount all the time as prices of lovesome materials may also change every now and then.The common verbal expression used to compute for the product pric e using indeterminate pricing is Price = (Ave. varying Cost + %Fixed Cost) * (1 + %Markup) (Wikipedia, n. d. ) Given that total product cost may change, the formula above takes that into consideration and adds a authoritative percent of fixed cost depending on the variability of the product cost. The percent markup is hooked on the desired markup of the product maker or firm owner. The formula above is just one example of how indeterminate is done. There are actually distinct methods of doing cost-plus pricing.The above formula is the so-called standard markup pricing where the selling price is the result of adding a fixed profit percentage, called markup, to the fixed cost of the product (McCalley, 1996). The scenario below is a simple illustration of this cost-plus method The materials used to manufacture a pen cost $10 sequence the labor and other overhead be incurred per pen manufactured summed up to $5. Therefore, the total product cost is $15. The percent markup set by the manufacturing company for this pen is 50%.Therefore, the total price of the pen is metrical as $15 * (1 + 50%) = $22. 50. The profit (markup) for the pen, therefore, is $7. 50. A nonher method of calculating cost-plus pricing is basing the profit margin from the selling price instead of adding to the cost. Using the alike scenario above, this method is illustrated as follows The total cost of the pen is $15 and the selling price is $50. This means that the profit margin intractable upon was 33. 33% of the selling price. This percent is calculated as follows ($22. 50 $15) ? $22.50 = 0. 3333 or 33. 33%. The first method shown is a markup or additional amount to the total cost, objet dart the second method is a profit margin against the actual selling price of the product. Coming up with the profit amount may be calculated differently but their concepts are essentially the like which is cost-plus pricing. Advantages One of the major advantages of cost-plus pricing strat egy is the ease of weighing of the cost and price amount. There are no complex computations and formulas to be used in determining the product price.Another plus factor of this is that there is not a good deal complex information in order to determine the product price. Beginners or young level managers can definitely marry this kind of pricing strategy. If there would be an increase in the product costs, price increase would be right encompassingy justify with this type of pricing strategy. Moreover, if competitors would be adopting the same pricing strategy, product price differences would not be that big and could also impart a stable state (tutor2u, n.d. ). Disadvantages With advantages pass off disadvantages as well. Jensen (n. d. ) enumerated the following problems that may be encountered with the cost-plus pricing strategy (1) the price established may be so high that the firm will lose money by dint of lost sales (2) all cost-plus calculations require an estimate of sales to be accurate and (3) cost-plus pricing can cause the firm to underprice the products or services thus cheating the company of sales it could have earned. Jensen (n. d. ) recommends that a better pricing strategy would be to consider the true(a) value of the product and its worth to the customer. References Giddens, N. , Parcel, J. , & Brees, M. (2005). Selecting an provide Pricing Strategy. Retrieved March 9, 2007 from http//www. extension. iastate. edu/agdm/wholefarm/hypertext markup language/c5-17. html Jensen, M. (n. d. ). How To Avoid The Most Common Pricing Mistakes. Retrieved March 9, 2007 from http//www. 1000ventures.com/business_guide/marketing_pricing_psychology_p1_mistakes. html McCalley, R. W. (1996). Marketing sway Management People, Products, Programs, and Markets. Westport, CT Praeger Publishers tutor2u. (n. d. ). pricing full cost plus pricing. Retrieved March 9, 2007 from http//www. tutor2u. net/business/marketing/pricing_costplus. asp Wikipedia. (n. d. ). cost-plus pricing. Retrieved March 9, 2007 from http//en. wikipedia. org/wiki/Cost-plus_pricing