What does cost-based pricing refer to?

Cost-based pricing is a pricing strategy in which the final price of a product or service is determined by adding a specific markup to the total production costs. This method ensures that all costs associated with making the product—such as materials, labor, overhead, and other expenses—are covered, and that the business makes a profit on each item sold.

By using this approach, businesses can establish a straightforward pricing structure that directly correlates to their costs. This can be particularly effective for manufacturers and retailers who have a clear understanding of their cost structures and want to maintain consistency in their pricing. In contrast to other pricing strategies, such as competitor-based pricing or demand-based pricing, cost-based pricing focuses primarily on internal costs rather than external market factors.

Understanding this method helps businesses to ensure sustainability and profitability, especially in markets where profit margins need to be carefully managed.