Question

Discuss cost base pricing in detail?

Answer 1

Ans) Cost base pricing is a method of determining the price of a commodity by adding a fixed percentage over the cost of production. For eg- a company decides to add 80% over cost of production to decide the selling price of a commodity, suppose the cost of production is $200, so the selling price set by the seller will be $360. Hence, it solely looks at the unit cost and ignores the price that is set by the competitors.

The advantage of this method is that it is simplest technique and also a fix percentage of return is assured. It is generally seen that companies add an arbitrary price over cost of production, may be 300% or 600% over cost price. It is done to avert the risk of non inclusion of unseen costs and it acts as buffer in times when the cost of production increases. Further this pricing technique particularly targets the consumer who is able to pay that amount and exploit them.

The downside of this method is that it does not take into account the demand of the product, which is an important element. Secondly, many a times it is not possible to correctly calculate the cost of production. Further, it excludes the opportunity cost involved. And it cannot be applied to perishable items.