Cost-plus pricing
Cost-plus pricing is a pricing strategy by which the selling price of a product is determined by adding a specific fixed percentage (a "markup") to the product's unit cost. Essentially, the markup percentage is a method of generating a particular desired rate of return.[1][2] An alternative pricing method is value-based pricing.[3]
Cost-plus pricing has often been used for government contracts (cost-plus contracts), and has been criticized for reducing incentive for suppliers to control direct costs, indirect costs and fixed costs whether related to the production and sale of the product or service or not.
Companies using this strategy need to record their costs in detail to ensure they have a comprehensive understanding of their overall costs.[2] This information is necessary to generate accurate cost estimates.
Cost-plus pricing is especially common for utilities and single-buyer products that are manufactured to the buyer's specification, such as for military procurement.
Mechanics
The three parts of computing the selling price are computing the total cost, computing the unit cost, and then adding a markup to generate a selling price (refer to Fig 1).
Step 1: Calculating total cost
Total cost = fixed costs + variable costs
Fixed costs do not generally depend on the number of units, while variable costs do.
Step 2: Calculating unit cost
Unit cost = (total cost/number of units)
Step 3a: Calculating markup price
Markup price = (unit cost * markup percentage)
The markup is a percentage that is expected to provide an acceptable rate of return to the manufacturer.[1]
Step 3b: Calculating Selling Price (SP)
Selling Price = unit cost + markup price
Example
A shop selling a vacuum cleaner will be examined since retail stores generally adopt this strategy.
Total cost = $450
Markup percentage = 12%
Markup price = (unit cost * markup percentage)
Markup price = $450 * 0.12
Markup price = $54
SP = unit cost + markup price
SP = $450 + $54
SP = $504
Ultimately, the $54 markup price is the shop's margin of profit.
Rationale
Buyers may perceive that cost-plus pricing is reasonable. In some cases, the markup is mutually agreed upon by buyer and seller. For markets that feature relatively similar production costs, companies do not have a dominant strategy.[4] Therefore, cost-plus pricing can offer competitive stability, decreasing the risk of price competition (such as price wars), if all companies adopt cost-plus pricing. The strategy enables price changes to goods and services relative to increases or decreases in the product cost which are simple to communicate and justify to customers.[5] When there is little market intelligence, the use of a cost-plus pricing strategy compensates for the lack of information by setting prices based on actual costs.[6] This method is generally adopted by retail companies such as grocery or clothing stores.[5]
Cost-based pricing is a way to induce a seller to accept a contract the costs of which represent a large fraction of the seller's revenues, or for which costs are uncertain at contract signing, as for example for research and development.
Economic theory
Cost-plus pricing is not common in markets that are (nearly) perfectly competitive, for which prices and output are such that marginal cost (the cost of producing an additional unit) equals marginal revenue. In the long run, marginal and average costs (as for cost-plus) tend to converge, reducing the difference between the two strategies. It works well when a business is in need of short-term finance.
Elasticity considerations
Although this method of pricing has limited application as mentioned above, it is used commonly for the purpose of ensuring a business covers its costs by "breaking even" and not operating at a loss whilst generating at least a minimum rate of profit.[7] In spite of its ubiquity, economists rightly point out that it has serious flaws. Specifically, the strategy requires little market research hence it does not account for external factors such as consumer demand and competitor's prices when determining an appropriate selling price.[1] There is no way in advance of determining if potential customers will purchase the product at the calculated price. Regardless of which pricing strategy a company chooses, price elasticity (sensitivity of demand to price) is a vital component to examine.[8] To compensate for this, some economists have tried to apply the principles of price elasticity to cost-plus pricing.
다음과 같은 사실을 알고 있다.
MR = P + ((dP/dQ) * Q)
여기서:
MR = 한계 수익
P = 가격
(dP/dQ) = 양에 대한 가격의 파생상품
Q = 수량
이익 극대화자는 한계수익이 한계비용(MR = MC)과 같은 시점에 수량을 설정한다는 것을 알고 있으므로, 공식은 다음과 같이 작성할 수 있다.
MC = P + ((dP/dQ) * Q)
P로 나누고 수율을 재배열:
MC / P = 1 +((dP / dQ) * (Q / P)
그리고 (P/MC)는 마크업(markup)의 한 형태이기 때문에, 다음과 같은 방법으로 주어진 시장 탄력성에 대한 적절한 마크업을 계산할 수 있다.
(P / MC) = (1 – (1/E))
여기서:
(P / MC) = 한계 비용에 대한 마크업
E = 수요의 가격 탄력성
탄성이 무한대인 극단적인 경우:
(P / MC) = (1 – (1/99999999999999)))
(P / MC) = (1 / 1)
가격은 한계비용과 같다. 마크업이 없다. 다른 극단에서는 탄성이 단결과 동일한 경우:
(P /MC) = (1 – (1/1))
(P / MC) = (1 / 0)
마크업이 무한하다. 대부분의 사업가들은 한계비용 계산을 하지 않지만, 평균 가변비용(AVC)을 사용하여 동일한 결론에 도달할 수 있다.
(P / AVC) = (1 / (1 – (1/E)))
기술적으로 AVC는 스케일(LVC = LAC = LMC)에 대한 지속적인 수익 상황에서만 MC를 대체할 수 있는 유효한 대체품이다.
사업가들이 비용+가격 책정을 할 때 원가에 적용하는 가격 인상을 선택할 때, 그들은 의식적이든 아니든, 수요의 가격 탄력성을 고려해야 하고 종종 그렇게 해야 한다.
참고 항목
참조
- ^ a b Kenton, Will. "How Variable Cost-Plus Pricing Works". Investopedia. Retrieved 2021-04-26.
- ^ a b Carlson, Rosemary. "Defining and Calculating Cost-Plus Pricing". The Balance Small Business. Retrieved 2021-04-26.
- ^ Jain, Sudhir (2006). Managerial Economics. Pearson Education. ISBN 978-81-7758-386-1.
- ^ Park, Anna (2010). "Price-setting behaviour: Insights from Australian firms". RBA.
- ^ a b "Cost plus pricing definition". AccountingTools. Retrieved 2021-04-26.
- ^ "Pricing - cost-plus strategies Learn economics". www.learn-economics.co.uk. Retrieved 2021-04-26.
- ^ [1], McKinsey Quarterly, 2003년 8월
- ^ "Pricing Strategies & Elasticity". Fundamentals of Marketing. 2014-12-16. Retrieved 2021-04-26.
