Pricing Policy and Strategy - Research Article from Encyclopedia of Management

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Cost-Based Pricing

The traditional pricing policy can be summarized by the formula:
Cost + Fixed profit percentage = Selling price.

Cost-based pricing involves the determination of all fixed and variable costs associated with a product or service. After the total costs attributable to the product or service have been determined, managers add a desired profit margin to each unit such as a 5 or 10 percent markup. The goal of the cost-oriented approach is to cover all costs incurred in producing or delivering products or services and to achieve a targeted level of profit.

By itself, this method is simple and straightforward, requiring only that managers study financial and accounting records to determine prices. This pricing approach does not involve examining the market or considering the competition and other factors that might have an impact on pricing. Cost-oriented pricing also is popular because it is an age-old practice that uses...

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This section contains 2,557 words
(approx. 9 pages at 300 words per page)
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Encyclopedia of Management
Pricing Policy and Strategy from Encyclopedia of Management. ©2005-2006 Thomson Gale, a part of the Thomson Corporation. All rights reserved.
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