As an online retailer, there are several pricing strategies you can adopt or combine. Cost-plus pricing is the most easy-to-apply strategy that can save you all the time on earth. But is it effective?
By the end of this article, you’ll learn:
- How to implement cost-plus pricing with examples
- Whether it is an effective strategy for online retailers
- Advantages and disadvantages (in the FAQ section).
What is cost-plus pricing?
It’s a pricing strategy where a business calculates the costs of a product and adds the desired markup on top.
You can calculate the price for a product by using the formula below.
Overhead costs refer to the costs of operating a business. In addition, some of the ecommerce business costs are listed below. Most of them are not directly linked to the production process.
- Your domain
- Website hosting
- Rent (if you have an office space)
- Storing your products in a warehouse
- Shipping costs if you consolidate these for your customers
- Raw materials (if you manufacture the products yourself)
- Marketing budget
- Credit card fees
The markup, however, entirely depends on the targeted profit. Let’s say you sell a speaker and target a 20% profit per unit. The overall cost per unit is $60.
Here’s how you calculate the final selling price.
Who uses cost-plus pricing?
Traditionally, fashion brands implemented cost-plus pricing for its simplicity and convenience. But simplicity doesn’t bring success anymore. Online retailers must have competitive prices to attract price-sensitive shoppers in a world where these shoppers can easily access the best deals.
Cost-plus pricing doesn’t answer ecommerce business objectives and needs. That’s why many businesses formerly using this strategy dropped it and moved on to more competitive strategies while transforming to digital.
So, let’s explain why it damages a company’s competitive strength.
Say our store sells consumer electronics. After calculating the costs, the owner adds a…
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