Cost based pricing - part 1

In this lesson

1. 0:00 Understanding costs and pricing strategy
2. 1:00 Price volume and cost relationships explained
3. 2:27 Cost plus pricing fundamentals
4. 3:10 Cost plus pricing in practice industries
5. 5:01 Steps to implement cost plus pricing
6. 6:18 Challenges with cost plus pricing
7. 8:06 Target Costing as alternative approach

About this lesson

This is essential for FM and MA papers, particularly when pricing decisions need to reflect production costs and profitability targets. Cost-plus pricing starts with understanding your total cost per unit, then adds a profit markup to arrive at your selling price. The process sounds straightforward, but there are important decisions to make: should you use full production costs, include non-production overheads, or focus only on marginal costs? The answer depends on your business context and contract type. You'll also see why cost-based pricing works well in industries like construction and professional services, where customers commission bespoke work and pricing naturally reflects the effort and resources required. The key limitation of cost-plus pricing is its lack of external focus—it relies on internal cost data without considering what customers are willing to pay or what competitors charge. This matters most in competitive, mass-market industries where demand is price-sensitive. By the end of this lesson, you'll understand when cost-plus pricing is the right approach and when alternative methods like target costing might serve your business better.

Duration: 9m