cost-based pricing

Definition

Using the cost of production or fulfillment as the basis for pricing goods or services. Using this method, the selling price of a product will be the cost to produce it, including both direct and indirect costs, plus an additional amount to generate profit for the seller.

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Sam Walton was an innovator in using cost-based pricing to offer goods in his stores, passing savings on to customers and generating a very loyal following.

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The company failed to maximize their profits as a result of their cost-based pricing which neglected to account for the market's willingness to pay an even higher price.

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It is important for restaurants to use Cost-Based Pricing when setting menu prices. While some items may use similar cost of ingredients, the cost to produce, or labor cost of the item may vary. This is important to consider for bottom line profits.

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