Full Cost plus Pricing

This is a kind of pricing strategy in which you add all the costs that are involved in manufacturing and obtaining an end product and add a markup to the total cost price of the product in order to achieve the final price of the product. In this price setting method the costs that are added up include the production costs, the over head costs, and the direct labor costs, administrative costs, marketing costs and selling costs. A markup is added in the form of a percentage to this cost in order to achieve some profit. The formula through which the final price is determined can be shown as under:-

Total Production Costs + Selling and Administrative Costs + Markup / Number of units of products expected to sell

This type of pricing strategy is implemented in a situation where the products and services are created or sold as a result of custom request from the customer and there is no market or competitor pressure on the seller in terms of pricing decisions. In some cases this method is used to set the long term price of the products that are sufficiently high to earn a profit after all the costs related to the product has been incurred.

There are a number advantages and disadvantages of full cost plus pricing. The number one advantage of this method is that it is easy to use and simple to calculate. There is a likely possibility of occurring profit by using this method of price calculation. This type of pricing strategy is also justifiable in front of the customer. On the other hand the disadvantages of this strategy involves the ignorance of the competition, ignoring the price elasticity, overrunning of the product costs and too much simplicity in calculation that it can only determined the price of single product not the entire product mix.

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