What is cost-plus pricing and what risk does it pose to strategy?

What is cost-plus pricing and what risk does it pose to strategy?

• A. Price = cost plus markup; risks misalignment with demand, competition, and value
• B. Price based on market demand
• C. Price based on dynamic pricing
• D. Price determined by supply costs

Answer: (A)

Cost-plus pricing means setting the selling price by taking your costs and adding a fixed markup to earn a target profit. This approach focuses on recovering internal costs rather than reflecting what customers are willing to pay, the value they perceive, or how competitors price similar offerings. The big risk to strategy is misalignment with market signals: if you price based on cost alone, you may overprice in markets with price-sensitive demand or underprice where customers see high value, leaving money on the table or losing share to competitors. It also discourages cost discipline and efficiency, since the markup can cushion higher costs, and it ignores how price should vary by customer segment, channel, or changing competitive dynamics. In contrast, strategic pricing ties price to customer value, demand, and competitive context, which helps the business capture more of the value it delivers.

Cost-plus pricing means setting the selling price by taking your costs and adding a fixed markup to earn a target profit. This approach focuses on recovering internal costs rather than reflecting what customers are willing to pay, the value they perceive, or how competitors price similar offerings. The big risk to strategy is misalignment with market signals: if you price based on cost alone, you may overprice in markets with price-sensitive demand or underprice where customers see high value, leaving money on the table or losing share to competitors. It also discourages cost discipline and efficiency, since the markup can cushion higher costs, and it ignores how price should vary by customer segment, channel, or changing competitive dynamics. In contrast, strategic pricing ties price to customer value, demand, and competitive context, which helps the business capture more of the value it delivers.