Cost-Based Pricing: Cost-Plus Formula & Example
Definition
Cost-based pricing sets the selling price by working out the full cost of a product or job and adding a fixed percentage or amount for profit. The best-known form is cost-plus pricing: price = cost × (1 + markup %).
| Term | Cost-based pricing (cost-plus pricing) |
|---|---|
| In Hindi | लागत-आधारित मूल्य निर्धारण (कॉस्ट-प्लस प्राइसिंग) |
| Area | Business |
| Search phrase | cost based pricing |
| Try it | Margin vs markup |
लागत-आधारित मूल्य निर्धारण (कॉस्ट-प्लस प्राइसिंग) — हिंदी में अर्थ
लागत-आधारित मूल्य निर्धारण में किसी उत्पाद या काम की पूरी लागत निकालकर उस पर मुनाफ़े का तय प्रतिशत या रक़म जोड़कर बिक्री मूल्य तय किया जाता है। सबसे आम तरीका कॉस्ट-प्लस है: मूल्य = लागत × (1 + मार्कअप %)।
The cost-plus formula
Selling price = Total cost × (1 + Markup %). Total cost = material + labour + machine and overheads + freight, packing and any other cost of the job. If you think in margin instead: Selling price = Total cost ÷ (1 − Margin %).
The two are not the same number. A 25% markup gives a 20% margin; a 25% margin needs a 33.3% markup. Quoting a 'margin' using the markup formula is one of the commonest ways jobs lose money.
When it works and when it does not
It suits make-to-order and project work — fabrication, panels, machinery, contract manufacturing — where every job is different and the customer accepts a quotation built from cost. It is simple to explain and protects margin if the cost is right.
It ignores what the customer will pay and what competitors charge, and it is only as good as the cost estimate: forgotten overheads or scrap go straight out of profit. Compare quoted against actual cost after each job and correct the estimate.
Example
A fabricated frame: material ₹42,000, labour ₹9,000, machine and overheads ₹6,500, painting and packing ₹2,500 — total cost ₹60,000. With a 20% markup the price is ₹60,000 × 1.20 = ₹72,000, a margin of 16.7%. To earn a 20% margin instead, the price is ₹60,000 ÷ 0.80 = ₹75,000.
Related tools and guides
Frequently asked questions
What is cost-based pricing?
Setting the price by adding a profit percentage or amount to the full cost of the product or job.
What is the cost-plus pricing formula?
Selling price = Total cost × (1 + Markup %). For a target margin, use Total cost ÷ (1 − Margin %).
What are the disadvantages of cost-plus pricing?
It ignores customer value and competitor prices, and any error in the cost estimate reduces profit directly.
What is the difference between markup and margin?
Markup is profit as a percentage of cost; margin is profit as a percentage of the selling price. A 25% markup is a 20% margin.
Related terms
- Capex vs opexCapex (capital expenditure) is money spent on long-term assets such as machinery or buildings; it is capitalised and depreciated. Opex (operating expenditure) is the day-to-day cost of running the business — wages, power, rent — and is charged to profit in the year.
- Customer relationship management (CRM)Customer relationship management (CRM) is the practice — and the software — of recording every interaction with leads and customers in one place, so that enquiries are followed up, deals are tracked to an order and customers are kept.
- Customer service (after-sales)Customer service is the help a business gives its customers before, during and after a sale — answering questions, fixing problems and keeping promises. For a manufacturer the larger part is after-sales service: complaints, repairs, warranty, maintenance and spares.
- EPF payment online (EPFO portal)EPF payment online is the monthly process in which an employer uploads the Electronic Challan cum Return (ECR) for its employees on the EPFO Unified Portal, generates a challan and pays the PF contributions by net banking — due by the 15th of the following month.
- ESIC payment onlineESIC payment online is the monthly process in which an employer files each covered employee's days worked and wages on the ESIC employer portal, generates a challan and pays the ESI contributions — employee 0.75% and employer 3.25% of gross wages — by the 15th of the following month.
- Incoterms (EXW, FOB, CIF, DDP)Incoterms are standard trade terms published by the International Chamber of Commerce that set out, for a sale of goods, who arranges and pays for transport, insurance and customs, and the point at which risk passes from seller to buyer.