Businesses commonly use the cost-plus markup method to calculate selling prices for their products. This method adds either a predetermined markup percentage or a flat dollar amount to the total product cost. There are several advantages for companies who use this method to arrive at pricing decisions.
Simplicity
The cost-plus markup method is simple to calculate and uses data that has already been accumulated. Information that is currently recorded in the company's accounting records is gathered to use as a starting point. Cost accounting combines the direct materials, direct labor and factory overhead costs to determine a total cost for the product. Management also needs to commit to using either a markup percentage or a flat dollar amount. If a markup percentage is used, the unit cost is multiplied by the percentage to determine the amount of the markup. If a flat dollar amount is used, this is the amount of the markup. The amount of the markup is added to the product cost to determine the selling price.
Market Stability
Committing to using cost-plus markup as a method for determining each product's selling price brings stability to the market. Members of the sales team will not be caught up in negotiation with customers in regard to price since the pricing method is already committed to. Supply and demand have minimal impact on the pricing, since the price is based upon the product cost, not the demand. Customers will recognize that the company did not raise prices simply because of increasing demand and feel more comfortable doing business with the company in the future. The market between the company and its customers remains stable throughout downturns in the economy.
Integrity
Customers can distrust companies who take advantage of market conditions to raise prices. These companies are perceived as being unethical. For businesses whose sales depend on relationship-building between the company and its customers, these actions will result in lost sales. Keeping prices level by using a cost-plus markup methodology for pricing will maintain the perception of integrity and high ethics by the company. The trust that the customers feel for the company will transfer from the pricing details to the perception of the entire company. Customers will consider the quality and service to be higher as well and will reward that company with repeat business.
Tags: amount markup, cost-plus markup, cost-plus markup method, dollar amount, flat dollar