Cost-plus pricing is one of the simplest pricing methods: add a standard markup to the cost of producing a product. If a widget costs $10 to make and the company applies a 20 percent markup, the selling price is $12. The markup covers overhead and profit.

The method is common in manufacturing, construction, and government contracting. It is easy to calculate, easy to justify, and ensures that costs are covered. For companies that bid on projects with uncertain costs, it provides a predictable margin.

Problems with cost-plus pricing:

• It ignores what customers are willing to pay.
• It ignores competitor prices.
• It does not account for perceived value.
• It can reward inefficiency if costs are passed on automatically.

Cost-plus works best for commodity products where competition is based on price and demand is relatively stable. It works poorly for luxury goods, innovative products, and markets where value is subjective. A company that prices only by cost may leave money on the table or price itself out of the market without realizing why.