Cost Plus Approach

by Thomas James ; Updated September 26, 2017
The cost plus approach is a means of setting prices.

The cost-plus approach is a method used by businesses to determine what price to offer a product for. Cost-plus methods are best understood in contrast with alternative approaches to setting prices, such as the price-minus approach.

The Cost-Plus Approach

In the cost-plus approach, company managers look at how much it costs the company to produce a particular product. Once the managers know the cost of the product, they add a profit margin to this amount and offer the product for sale on the market.

The Price-Minus Approach

The price-minus approach is the opposite of the cost-plus approach. In the price-minus system companies use market research to determine how much consumers will pay for a particular product. Once they know have this information, they work backwards, subtracting a profit margin and working out how to produce the product at this final target cost.

Pros and Cons of Both Approaches

Cost plus has the advantage that it is simple and does not require extensive market research. However, cost plus has the disadvantage that it ignores the role of the consumer demand in determining prices and provides no incentive for efficiency.

Price minus has the advantage that it encourages companies to reduce costs as much as possible, but it can be expensive to acquire all the necessary information about the market.

About the Author

Thomas James has been writing professionally since 2008. His work has appeared on the science-fiction blog Futurismic. He writes about technology, economics, management, science fiction, politics and philosophy. James graduated from Trinity Catholic School and holds A-levels in physics, maths, chemistry and an AS-level in English language.

Photo Credits

  • carrots with price image by Jo Ann Koch from Fotolia.com
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